DOD Financial Management: Challenges in Attaining Audit Readiness and Improving Business Processes and Systems
Published: 2012-04-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Over the years, the Department of Defense (DOD) has initiated several efforts intended to improve its financial management operations and ultimately achieve an unqualified (clean) opinion on its financial statements. These efforts have fallen short of sustained improvement in financial management and financial statement auditability.
In this statement, GAO provides its assessment of DODs progress toward: (1) producing an auditable Statement of Budgetary Resources (SBR) by fiscal year 2014 and a complete set of auditable financial statements by fiscal year 2017, including the development of interim milestones for both aforementioned audit readiness goals; (2) acquiring and implementing new enterprise resource programs and other critical financial management systems; (3) reengineering business processes and instituting needed controls; and (4) implementing a comprehensive business enterprise architecture and transition plan, and improved investment control processes.
This statement is primarily based on GAOs prior work related to the departments efforts to achieve audit readiness, implement modern business systems, and reengineer its business processes. GAO also obtained and compared key milestones in a February 2012 DOD briefing on its updated plans to accelerate achieving SBR auditability with the May 2011 Financial Improvement and Audit Readiness plan but did not independently verify the updated information in the February 2012 briefing.
section_title: What GAO Found
paragraphs: GAOs recent work highlights the types of challenges facing the Department of Defense (DOD) as it strives to attain audit readiness and reengineer its business processes and systems. The urgency in addressing these challenges has been increased by the goals of an auditable DOD Statement of Budgetary Resources (SBR) by the end of fiscal year 2014 and a complete set of auditable financial statements by the end of fiscal year 2017. For example, GAOs 2011 reporting highlights difficulties the DOD components experienced in attempting to achieve an auditable SBR. These include:
tthe Navys and the Air Forces premature assertions of audit readiness and missed interim milestones;
the Armys inability to locate and provide supporting documentation for its military pay;
the Navys and Marine Corps inability to reconcile their Fund Balance with Treasury (FBWT) accounts; and
the Marine Corps inability to receive an opinion on both its fiscal years 2010 and 2011 SBRs because it could not provide supporting documentation in a timely manner, and support for transactions was missing or incomplete.
In a February 2012 briefing on its updated plans, DOD accelerated milestones for its components in some cases, significantlyto accomplish the 2014 SBR goal. For example, the Air Force had planned to validate its audit readiness for many SBR-related items in fiscal year 2016; however, the departments February 2012 accelerated plans show that most of the Air Forces SBR line items will be audit-ready in fiscal years 2013 or 2014. Also, in its February 2012 update DOD shows that 7 of 24 material general fund Defense Agencies and Other Defense Organizations have either already had SBR audits or are ready to have their SBRs audited, which represent important positive steps.
DOD has stated it considers the successful implementation of its enterprise resource planning (ERP) systems critical to transforming its business operations, addressing long-standing weaknesses, and ensuring the department meets its mandated September 30, 2017 auditability goals. However, in 2011, GAO reported that independent assessments of two of these systemsthe Armys and Air Forces new general ledger systemsidentified operational problems, gaps in capabilities that required manual workarounds, and training that was not focused on system operation. Moreover, users of these systems had difficulties using these systems to perform daily operations. GAO also reported in 2011 on numerous weaknesses in DODs enterprise architecture and business processes that affect DODs auditability. For example, while DOD continued to update its corporate enterprise architecture, it had not yet augmented its corporate architecture with complete, coherent subsidiary architectures for DOD components such as the military departments. Also, while DOD and the military departments largely followed DODs Business Process Reengineering Guidance to assess business system investments, they had not yet performed the key step of validating assessment results.
section_title: What GAO Recommends
paragraphs: GAO has made prior recommendations to address these issues. DOD has generally agreed with these recommendations and is taking corrective actions in response. GAO has work underway to evaluate DODs continuing efforts in these areas.

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 and  related business operations and to achieve audit readiness. DOD has  been required to prepare departmentwide financial statements and have  them audited since 1997, but through 2011, has not been able to meet  this requirement. On October 13, 2011, the Secretary of Defense  directed the department to achieve audit readiness for the Statement of  Budgetary Resources (SBR) for General Fund activities by the end of  fiscal year 2014 as an interim milestone toward meeting the mandate in  the National Defense Authorization Act (NDAA) for Fiscal Year 2010 to  achieve full audit readiness for DOD’s complete set of financial  statements by the end of 2017. Given the federal government’s fiscal  challenges, it is more important than ever that the Congress, the  administration, and federal managers have reliable, useful, and timely  financial and performance information, particularly for the government’s  largest department.
Today, I will discuss DOD’s progress toward: (1) achieving the goals of an  auditable SBR by fiscal year 2014 and a complete set of auditable  financial statements by fiscal year 2017, including the development of  interim milestones for both audit readiness goals, (2) acquiring and  implementing new enterprise resource programs and other critical  financial management systems, (3) reengineering business processes  and instituting needed controls, and (4) implementing a comprehensive  business enterprise architecture and transition plan, and improved  investment control processes. My statement today is primarily based on  our prior work related to the department’s efforts to achieve audit  readiness, implement modernized business systems and a business  enterprise architecture, and reengineer its business processes. In  addition, we are providing information on DOD’s updated plans for  achieving auditability presented at a February 2012 briefing. Specifically,  we are presenting a comparison of key milestones in the February 2012  DOD briefing that outlined its plans to accelerate the timeframe to  achieve SBR auditability with DOD’s May 2011 Financial Improvement  and Audit Readiness (FIAR) plan. We also conducted interviews with  DOD officials about the February 2012 briefing. We did not independently  verify information contained in the February 2012 briefing with DOD or  any of its components or agencies. Our work on which this testimony is  based was conducted in accordance with generally accepted government  auditing standards. 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. Additional  information on our scope and methodology is available in previously  issued products.
subsections: section_title: Background
paragraphs: According to the fiscal year 2013 President’s Budget, DOD accounts for  about 57 percent of the discretionary federal budget authority.   (See figure 1.)
For fiscal year 2011, of the 24 agencies covered by the Chief Financial  Officers Act of 1990 (CFO Act), DOD was the only agency to receive a  disclaimer of opinion on all of its financial statements.Inspector General (IG) reported that  the department’s fiscal year 2011 financial statements would not  substantially conform to generally accepted accounting principles;
DOD’s financial management and feeder systems were unable to  adequately support material amounts on the financial statements; and  long-standing material internal control weaknesses identified in prior  audits continued to exist, including material weaknesses in areas such  as financial management systems, Fund Balance with Treasury,  Accounts Receivable, and General Property, Plant, and Equipment.
In 2005, the DOD Comptroller first prepared the Financial Improvement  and Audit Readiness (FIAR) Plan for improving the department’s  business processes. The FIAR Plan is DOD’s strategic plan and  management tool for guiding, monitoring, and reporting on the  department’s financial management improvement efforts. As such, the  plan communicates progress in addressing the department’s financial  management weaknesses and achieving financial statement auditability.  In accordance with the NDAA for Fiscal Year 2010, DOD provides reports  to relevant congressional committees on the status of DOD’s  implementation of the FIAR Plan twice a year—no later than May 15 and  November 15.
The NDAA for Fiscal Year 2010 also mandated that the FIAR Plan  include the specific actions to be taken to correct the financial  management deficiencies that impair the department’s ability to prepare  timely, reliable, and complete financial management information. 2010, the DOD Comptroller issued the FIAR Guidance to implement the  FIAR Plan. The FIAR Guidance provides a standardized methodology for  DOD components to follow for achieving financial management  improvements and auditability. The FIAR Guidance requires DOD  components to identify and prioritize their business processes into  assessable units, and then prepare a Financial Improvement Plan (FIP)  for each assessable unit in accordance with the FIAR Guidance. Many of  the procedures required by the FIAR Guidance are consistent with  selected procedures for conducting a financial audit, such as testing  internal controls and information system controls. In September 2010, we  reported that the department needed to focus on implementing its FIAR  Plan and that the key to successful implementation would be the efforts of  the DOD military components and the quality of their individual FIPs.
Pub. L. No.111-84, §1003(a)(2). components, such as the Army, Navy, and Air Force, are expected to  develop and implement FIPs in accordance with the FIAR Guidance. The  steps required for these plans include assessing processes, controls, and  systems; identifying and correcting weaknesses; assessing, validating,  and sustaining corrective actions; and ultimately achieving audit  readiness. After a component’s management determines that an  assessable unit is ready for audit, both the DOD Comptroller and the  DOD Inspector General (IG) review the related FIP documentation to  determine if they agree with management’s conclusion of audit readiness.
DOD intends to progress toward achieving financial statement auditability  by executing the FIAR Guidance methodology for groups of assessable  units across four waves. Under the FIAR Plan, successful execution of  the FIAR Guidance methodology for groups of assessable units across  these waves is intended to result in the audit readiness of various  components’ financial statements through fiscal year 2017. The first two  waves of the FIAR Plan focus on achieving the DOD Comptroller’s interim  budgetary priorities, which DOD believes should lead to an auditable  SBR. The third wave focuses on accountability for DOD’s mission-critical  assets, and the fourth wave focuses on the remaining assessable units  constituting DOD’s complete set of financial statements.
As mentioned earlier, the Secretary of Defense directed the department  to achieve audit readiness for the SBR for General Fund activities by the  end of fiscal year 2014. The NDAA for Fiscal Year 2012 reinforced this  directive by requiring that the next FIAR Plan Status Report—to be issued  in May 2012—include a plan, with interim objectives and milestones for  each military department and the defense agencies, to support the goal of  SBR audit readiness by 2014. The NDAA for Fiscal Year 2012 also  requires the plan to include process and control improvements and  business systems modernization efforts necessary for the department to  consistently prepare timely, reliable, and complete financial management  information.
The SBR is the only financial statement predominantly derived from an  entity’s budgetary accounts in accordance with budgetary accounting  rules, which are incorporated into generally accepted accounting  principles (GAAP) for the federal government. The SBR is designed to  provide information on authorized budgeted spending authority reported  in the Budget of the United States Government (President’s Budget),  including budgetary resources, availability of budgetary resources, and  how obligated resources have been used.
subsections: section_title: Overview of DOD’s Accounting and Business Operations
paragraphs: In November 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 continue to perform  certain finance and accounting activities at each military installation.  These activities vary by military service depending on what the services  retained and the number of personnel they transferred to DFAS. As  DOD’s accounting agency, DFAS is critical to DOD auditability as it  records 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 most of DOD’s  expenditures and are the source of most of the financial information that  DFAS uses to make payroll and contractor payments. The military  services also have responsibility for most of DOD’s assets and the related  information needed by DFAS to prepare annual financial statements  required under the CFO Act.
To support its operations, DOD performs an assortment of interrelated  and interdependent business functions, such as logistics, procurement,  health care, and financial management. As we have previously reported,  the DOD systems environment that supports these business functions  has been overly complex, decentralized, and error prone, characterized  by (1) little standardization across the department, (2) multiple systems  performing the same tasks and storing the same data, and (3) the need  for data to be entered manually into multiple systems. For fiscal year  2012, the department requested about $17.3 billion to operate, maintain,  and modernize its business systems. DOD has reported that it relies on  2,258 business systems, including 335 financial management systems,  709 human resource management systems, 645 logistics systems, 243  real property and installation systems, and 281 weapon acquisition  management systems.
section_title: Importance of Business Enterprise Architecture and Reengineering Business Processes
paragraphs: For decades, DOD has been challenged in modernizing its timeworn  business systems. Since 1995, GAO has designated DOD’s business  systems modernization program as high risk. In June 2011, 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. As our research on public and private sector  organizations has shown, two essential ingredients to a successful  systems modernization program are an effective institutional approach to  managing information technology (IT) investments and a well defined  enterprise architecture. For its business systems modernization, DOD is  developing and using a federated business enterprise architecture, which  is a coherent family of parent and subsidiary architectures, to help  modernize its nonintegrated and duplicative business operations and the  systems that support them.
Section 1072 of the NDAA for Fiscal Year 2010 requires that programs  submitted for approval under DOD’s business system investment  approach be assessed to determine whether or not appropriate business  process reengineering efforts have been undertaken. The act further  states that these efforts should ensure that the business process to be  supported by the defense business system modernization will be as  streamlined and efficient as practicable and the need to tailor commercial  off-the-shelf systems to meet unique requirements or incorporate unique  interfaces has been eliminated or reduced to the maximum extent  practicable.
section_title: Challenges in Achieving Audit Readiness
paragraphs: GAO’s recent work highlights the types of challenges facing DOD as it  strives to attain audit readiness and reengineer its business processes  and systems. DOD leadership has committed DOD to the goal of  auditable financial statements and has developed FIAR Guidance to  provide specific instructions for DOD components to follow for achieving  auditability incrementally. The department and its components also  established interim milestones for achieving audit readiness for various  parts (or assessable units) of the financial statements. These efforts are  an important step forward. The urgency in addressing these challenges  has been increased by the recent efforts to accelerate audit readiness  time frames, in particular attaining audit readiness for the department’s  SBR by fiscal year 2014. Our September 2011 report highlights the types  of challenges DOD may continue to face as it strives to attain audit  readiness, including instances in which DOD components prematurely  asserted audit readiness and missed interim milestones. Also, DOD’s  efforts over the past couple of years to achieve audit readiness for some  significant SBR assessable units have not been successful. However,  these experiences can serve to provide lessons for DOD and its  components to consider in addressing the department’s auditability  challenges.
subsections: section_title: DOD Component Compliance with FIAR Guidance Is Crucial to Ensuring Audit Readiness
paragraphs: DOD’s ability to achieve departmentwide audit readiness is highly  dependent on its military components’ ability to effectively develop and  implement FIPs in compliance with DOD’s FIAR Guidance. However, in  our September 2011 report, we identified several instances in which the  components did not prepare FIPs that fully complied with the FIAR  Guidance, resulting in premature assertions of audit readiness.
Specifically, as we reported in September 2011, the FIAR Guidance  provides a reasonable methodology for the DOD components to follow in  developing and implementing their FIPs.responsibilities of the DOD components, and prescribes a standard,  systematic approach that components should follow to assess processes,  controls, and systems, and identify and correct weaknesses in order to  achieve auditability. When DOD components determine that sufficient  financial improvement efforts have been completed for an assessable unit  in accordance with the FIAR Guidance and that the assessable unit is  ready for audit, the FIP documentation is used to support the conclusion  of audit readiness. Thus, complying with the FIAR Guidance can provide  a consistent, systematic means for DOD components to achieve and  verify audit readiness incrementally.
It details the roles and  We found that when DOD components did not prepare FIPs that fully  complied with the FIAR Guidance, they made assertions of audit  readiness prematurely and did not achieve interim milestones. While the  components initially appeared to meet some milestones by asserting  audit readiness in a timely manner, reviews of supporting documentation  for the FIPs of two assessable units and attempts to audit the Marine  Corps’ SBR revealed that the milestones had not been met because the  assessable units were not actually ready for audit. For example, the Navy  asserted audit readiness for its civilian pay in March 2010 and the Air  Force asserted audit readiness for its military equipment in December  2010. However, we reported that neither component had adequately  developed and implemented their FIPs for these assessable units in  accordance with the FIAR Guidance and were therefore not ready for  audit. The Marine Corps first asserted financial audit readiness for its  General Fund SBR on September 15, 2008. The DOD IG reviewed the  Marine Corps’ assertion package and on April 10, 2009, reported that the  assertion of audit readiness was not accurate, and that its documentation  supporting the assertion was not complete. GAO has made prior  recommendations to address these issues. DOD has generally agreed  with these recommendations and is taking corrective actions in response.
section_title: Reported DOD Progress toward Audit Readiness for the Statement of Budgetary Resources
paragraphs: The Secretary of Defense’s direction to achieve audit readiness for the  SBR by the end of 2014 necessitated that DOD’s components revise  some of their plans and put more focus on short-term efforts to develop  accurate data for the SBR in order to achieve this new accelerated goal.  In August 2011, DOD’s military components achieved one milestone  toward SBR auditability when they all received validation by an  independent public accounting firm that their Appropriations Receipt and  Distribution—a section of the SBR—was ready for audit. In addition, the  November 2011 FIAR Plan Status Report indicated that the Air Force  achieved audit readiness for its Fund Balance with Treasury (FBWT).
Further, in a February 2012 briefing on its accelerated plans, DOD  indicated that 7 of 24 material general fund Defense Agencies and Other  Defense Organizations are either already sustaining SBR audits or are  ready to have their SBRs audited. These accomplishments represent  important positive steps. Nevertheless, achieving audit readiness for the  military components’ SBRs is likely to pose significant challenges based  on the long-standing financial management weaknesses and audit issues  affecting key SBR assessable units. Our recent reports highlight some of  the difficulties that the components have experienced recently related to  achieving an auditable SBR, including  the Army’s inability to locate and provide supporting documentation  for its military pay;  the Navy’s and the Marine Corps’ inability to reconcile their Fund  Balance with Treasury accounts; and the Marine Corps’ inability to provide sufficient documentation to  auditors of its SBR.
To achieve SBR audit readiness by 2014, DOD and its components need  accelerated, yet feasible, well-developed plans for identifying and  correcting weaknesses in the myriad processes involved in producing the  data needed for the SBR. While DOD has developed an accelerated  FIAR Plan to provide an overall view of the department’s approach for  meeting the 2014 goal, most of the work must be carried out at the  component level.
The Army’s active duty military payroll, reported at $46.1 billion for fiscal  year 2010, made up about 20 percent of its reported net outlays for that  year. As such, it is significant to both Army and DOD efforts for achieving  auditability for the SBR. For years, we and others have reported  continuing deficiencies in the Army’s military payroll processes and  controls. Moreover, other military components such as the Air Force and  the Navy share some of these same military payroll deficiencies.
In March 2012, we reported that the Army could not readily identify a   DOD’s complete population of its payroll accounts for fiscal year 2010. FIAR Guidance states that identifying the population of transactions is a  key task essential to achieving audit readiness. However, the Army and  DFAS-Indianapolis (DFAS-IN), which is responsible for accounting,  disbursing, and reporting for the Army’s military personnel costs, did not  have an effective, repeatable process for identifying the population of  active duty payroll records. For example, it took 3 months and repeated  attempts before DFAS-IN could provide a population of service members  who received active duty Army military pay in fiscal year 2010. Further,  because the Army does not have an integrated military personnel and  payroll system, it was necessary to compare the payroll file to active Army  personnel records. However, DOD’s central repository for information on  DOD-affiliated personnel did not have an effective process for comparing  military pay account files with military personnel files to identify a valid  population of military payroll transactions.
In addition, the Army and DFAS-IN were unable to provide documentation  to support the validity and accuracy of a sample of fiscal year 2010  payroll transactions we selected for review. For example, DFAS-IN had  difficulty retrieving and providing usable Leave and Earnings Statement  files and the Army was unable to locate or provide supporting personnel  documents for a statistical sample of fiscal year 2010 Army military pay  accounts. At the end of September 2011, 6 months after we had provided  them with our sample of 250 items, the Army and DFAS-IN were able to  provide complete documentation for only 2 of the sample items and  provided only partial documentation for another 3 items; they were unable  to provide any documentation for the remaining 245 sample items.
At of the time of our report, the Army had several military pay audit  readiness efforts planned or under way. Timely and effective  implementation of these efforts could help reduce the risk of DOD not  achieving the SBR audit readiness goal of 2014. However, most of these  actions are in the early planning stages. Moreover, these initiatives, while  important, do not address (1) establishing effective processes and  systems for identifying a valid population of military payroll records, (2)  ensuring Leave and Earnings Statement files and supporting personnel  documents are readily available for verifying the accuracy of payroll  records, (3) ensuring key personnel and other pay-related documents that  support military payroll transactions are centrally located, retained in  service member Official Military Personnel Files, or are otherwise readily  accessible, and (4) requiring the Army’s Human Resources Command to  periodically review and confirm that service members’ Official Military  Personnel File records are consistent and complete to support annual  financial audit requirements. GAO has made prior recommendations to  address these issues. DOD has agreed with these recommendations and  is taking corrective actions in response.
A successful audit of the SBR is dependent on the ability to reconcile an  agency’s Fund Balance with Treasury (FBWT) with the Treasury records.  FBWT is an account that reflects an agency’s available budget spending  authority by tracking its collections and disbursements. Reconciling a  FBWT account with Treasury records is a process similar in concept to  reconciling a check book with a bank statement. In December 2011, we  reported that neither the Navy nor the Marine Corps had implemented  effective processes for reconciling their FBWT.
The Navy and the Marine Corps rely on the DFAS location in Cleveland  (DFAS-CL) to perform their FBWT reconciliations. We found numerous  deficiencies in DFAS processes that impair the Navy’s and the Marine  Corps’ ability to effectively reconcile their FBWT with Treasury records,  including the following.
There are significant data reliability issues with the Defense Cash  Accountability System (DCAS), which records daily collections and  disbursements activity. The Navy and Marine Corps rely on DCAS to  reconcile their FBWT to Treasury records.
DFAS-CL did not maintain adequate documentation for the sample  items we tested to enable an independent evaluation of its efforts to  research and resolve differences.
DFAS-CL recorded unsupported entries (plugs) to force Navy and  Marine Corps appropriation balances to agree with those reported by  Treasury instead of investigating and resolving differences between  these two services’ appropriation balances and those maintained by  Treasury.
Navy, Marine Corps, and DFAS-CL officials acknowledged that existing  FBWT policies and procedures were inadequate. Navy and DFAS-CL  officials stated that the base realignment and closure changes from 2006  through 2008 resulted in loss of experienced DFAS-CL personnel and  that remaining staff have not received the needed training. In response to  our recommendations, the Navy developed a plan of action and  milestones (POAM) intended to address the Navy’s audit readiness  weaknesses, including FBWT required reconciliations.
The Marine Corps received disclaimers of opinion from its auditors on its  fiscal year 2010 and 2011 SBRs because it could not provide supporting  documentation in a timely manner, and support for transactions was  missing or incomplete. Further, the Marine Corps had not resolved  significant accounting and information technology (IT) system  weaknesses identified in the fiscal year 2010 SBR audit effort.
The auditors also reported that the Marine Corps did not have adequate  processes and controls, including systems controls, for accounting and  reporting on the use of budgetary resources. Further, the Marine Corps  could not provide evidence that reconciliations for key accounts (such as  FBWT) and processes were being performed on a monthly basis. The  auditors also identified ineffective controls in key IT systems used by the  Marine Corps to process financial data. During fiscal year 2011, however,  the Marine Corps was able to demonstrate progress toward auditability.  For example, its auditors confirmed that as of October 2011, the Marine  Corps had fully implemented 32 out of 139 fiscal year 2010 audit  recommendations.
The results of the audit for fiscal year 2010 provided valuable lessons on  preparing for a first-time financial statement audit. In our September 2011  report, we identified five fundamental lessons that are critical to  success.  Specifically, the Marine Corps’ experience demonstrated that  prior to asserting financial statement audit readiness, DOD components  must (1) confirm completeness of populations of transactions and  address any abnormal transactions and balances, (2) test beginning  balances, (3) perform key reconciliations, (4) provide timely and complete  responses to audit documentation requests, and (5) verify that key IT  systems are compliant with the Federal Financial Management  Improvement Act of 1996 and are auditable. GAO has made prior  recommendations to address these issues. DOD has generally agreed  with these recommendations and is taking corrective actions in response.
These issues are addressed in GAO’s Standards for Internal Control in  the Federal Government and DOD’s FIAR Guidance. During our audit, Navy, Army, and Air Force FIP officials stated that they were aware of the  Marine Corps lessons and were planning to, or had, incorporated them to  varying degrees into their audit readiness plans.
In its November 2011 FIAR Plan, DOD provided an overall view of its  accelerated FIAR Plan for achieving audit readiness of its SBR by the end  of fiscal year 2014. In its February 2012 briefing, DOD recognized key  factors that are needed to achieve auditability such as the consistent  involvement of senior leadership as well as the buy-in of field  commanders who ultimately must implement many of the changes  needed. The plan also provided interim milestones for DOD components  such as the Army, Navy, Air Force, Defense Logistics Agency, and other  defense agencies. Acceleration substantially compresses the time allotted  for achieving some of these milestones. For example, the May 2011 FIAR  Plan Status Report indicated that the Air Force had planned to validate its  audit readiness for many SBR-related assessable units in fiscal year 2016  and that its full SBR would not be ready for audit until 2017. However, the  February 2012 briefing on the accelerated plans indicated that most of the  Air Force’s SBR assessable units will be audit-ready in fiscal years 2013  or 2014. These revised dates reflect the need to meet the expedited audit  readiness goal of 2014. (See figure 2.)
As discussed earlier, the key to audit readiness is for DOD components to  effectively develop and implement FIPs for SBR assessable units, and to  meet interim milestones as they work toward the 2014 goal. According to  Navy officials, the Navy plans to prepare a FIP for each of several  assessable units that make up the SBR. For example, for its SBR, Navy  officials told us they have identified assessable units for appropriations  received, and for various types of expenditures for which funds are first  obligated and then disbursed, such as military pay, civilian pay, contracts,  and transportation of people. The Air Force will prepare FIPs for  assessable units similar to those of the Navy. Army officials told us they  are taking a different approach from the Navy. They said that instead of  developing FIPs for discrete assessable units constituting the SBR, they  are preparing only one FIP for one audit readiness date for the Army’s  entire SBR, an approach similar to that of the Marine Corps.
section_title: Effective Implementation of Business Systems Is Critical
paragraphs: For years, DOD has been developing and implementing enterprise  resource planning (ERP) systems, which are intended to be the backbone  to improved financial management. DOD considers the successful  implementation of these ERP systems critical to transforming its business  operations and addressing long-standing weaknesses in areas such as  financial and supply-chain management and business systems  modernization. DOD officials have also stated that these systems are  critical to ensuring the department meets its mandated September 30,  2017, goal to have auditable departmentwide financial statements.  However, as we recently reported, six of these ERP systems are not  scheduled to be fully deployed until either fiscal year 2017 or the end of  fiscal year 2016.
The DOD IG reported that the Navy developed and approved deployment  of the Navy ERP System without ensuring that the system complied with  DOD’s Standard Financial Information Structure (SFIS) and the U.S.  Government Standard General Ledger. The DOD IG further stated that as a result, the Navy ERP System, which is expected to manage 54  percent of the Navy’s obligation authority when fully deployed, might not  produce accurate and reliable financial information.
DOD Inspector General, Navy Enterprise Resource Planning System Does Not Comply  With the Standard Financial Information Structure and U.S. Government Standard  General Ledger, DODIG-2012-051 (Arlington, Va.: Feb. 13, 2012).
Two ERP systems—the Army’s General Fund Enterprise Business  System (GFEBS) and the Air Force’s Defense Enterprise Accounting and  Management System (DEAMS)—are general ledger systems intended to  support a wide range of financial management and accounting functions.  However, DFAS users of these systems told us that they were having  difficulties using the systems to perform their daily operations. Problems  identified by DFAS users included interoperability deficiencies between  legacy systems and the new ERP systems, lack of query and ad hoc  reporting capabilities, and reduced visibility for tracing transactions to  resolve accounting differences. For example:
Approximately two-thirds of invoice and receipt data must be manually  entered into GFEBS from the invoicing and receiving system due to  interface problems. Army officials explained that the primary cause of  the problem was that the interface specification that GFEBS is  required by DOD to use did not provide the same level of functionality  as the interface specification used by the legacy systems. At the time  of our review, Army officials stated that they are working with DOD to  resolve the problem, but no time frame for resolution had been  established.
DEAMS did not provide the capability—which existed in the legacy  systems—to produce ad hoc query reports that could be used to  perform data analysis needed for day-to-day operations. DFAS  officials noted that when DEAMS did produce requested reports, the  accuracy of those reports was questionable. According to DFAS  officials, they are currently working with DEAMS financial  management to design the type of reports that DFAS needs.
While we were told that as of February 2012, the Army and the Air Force  had corrective actions under way to address identified deficiencies,  specific timelines had not been developed so that progress could be  monitored.
In February 2012, we reported that independent assessments of four  ERPs—the Army’s GFEBS and Global Combat Support System (GCSS- Army), and the Air Force’s DEAMS and Expeditionary Combat Support  System (ECSS)—identified operational problems, such as deficiencies in  data accuracy, inability to generate auditable financial reports, the need  for manual workarounds, and training. DOD oversight authority limited  the deployment of GFEBS and DEAMS on the basis of the results of the  independent assessments. However, in June 2011, DOD authorized  continued deployment of GFEBS and delegated further GFEBS  deployment decisions to the Under Secretary of the Army.
In addition to functional issues, we found that training was inadequate.  According to DFAS personnel as of February 2012, the training they  received for GFEBS and DEAMS did not fully meet their needs. DFAS  personnel informed us that the training focused on an overview of GFEBS  and DEAMS and how the systems were supposed to operate. While this  was beneficial in identifying how GFEBS and DEAMS were different from  the existing legacy systems, the training focused too much on concepts  rather than the skills needed for DFAS users to perform their day-to-day  operations. GAO has made prior recommendations to address these  issues. DOD has generally agreed with these recommendations and is  taking corrective actions in response.
section_title: Challenges in Developing and Implementing DOD’s Business Enterprise Architecture and Investment Control Processes
paragraphs: Improving the department’s business environment through efforts such as  DOD’s business enterprise architecture and improved business systems  management is an important part of helping DOD achieve auditability. In  June 2011, we reported that DOD had continued to make progress in  implementing a comprehensive business enterprise architecture,  transition plan, and improved investment control processes. However,  we also reported that long-standing challenges had yet to be addressed.  Specifically, we reported that while DOD continued to release updates to  its corporate enterprise architecture, the architecture had yet to be  augmented by a coherent family of related subsidiary architectures.example, we reported that while each of the military departments had  developed aspects of a business architecture and transition plan, none of  them had fully developed a well-defined business enterprise architecture   For  and transition plan to guide and constrain business transformation  initiatives.
We also reported in June 2011 that DOD continued to improve its  business system investment management processes, but that much  remained to be accomplished to align these processes with investment  management practices associated with individual projects and with  portfolios of projects. military departments all had documented policies and procedures for  identifying and collecting information about IT projects and systems to  support their business system investment management processes.  However, neither DOD nor the military departments had fully documented  policies and procedures for selecting a new investment, reselecting  ongoing investments, integrating funding with investment selection, or  management oversight of IT projects and systems. With regard to  portfolios of projects, DOD and the Departments of the Air Force and  Navy had assigned responsibility for managing the development and  modification of IT portfolio selection criteria. However, neither DOD nor  the military departments had fully documented policies and procedures  for creating and modifying IT portfolio selection criteria; analyzing,  selecting, and maintaining their investment portfolios; reviewing,  evaluating, and improving the performance of their portfolios; or  conducting post implementation reviews. In addition, while DOD largely  followed its certification and oversight processes, we reported that key  steps were not performed. For example, as part of the certification  process, DOD assessed investment alignment with the business  enterprise architecture, but did not validate the results of this assessment,  thus increasing the risk that decisions regarding certification would be  based on inaccurate and unreliable information.
These best practices are identified in GAO IT investment management guidance. See  GAO, Information Technology Investment Management: A Framework for Assessing and  Improving Process Maturity, GAO-04-394G (Washington, D.C.: Mar. 2004). management.and is taking corrective actions in response. It is essential that DOD  implement our recommendations aimed at addressing these long- standing challenges, as doing so is critical to the department’s ability to  establish the full range of institutional management controls needed for its  financial management as well as its overall business systems  modernization high-risk program. We have ongoing work to evaluate the  department’s efforts to comply with the NDAA for Fiscal Year 2012, as  amended, including updating our evaluations of DOD’s comprehensive  business enterprise architecture and transition plan and improved  investment control processes.
section_title: DOD Has Begun Performing Business- Process Reengineering Assessments
paragraphs: Section 1072 of the NDAA for Fiscal Year 2010 requires that new DOD  programs be assessed to determine whether or not appropriate business- process reengineering efforts have been undertaken. The act further  states that these efforts should ensure that (1) the business process to be  supported by the defense business system modernization will be as  streamlined and efficient as practicable and (2) the need to tailor  commercial-off-the-shelf systems to meet unique requirements or  incorporate unique interfaces has been eliminated or reduced to the  maximum extent practicable.investments we reviewed, DOD and the military departments used DOD’s  Business Process Reengineering Guidance (dated April 2011) to assess   In June 2011, we reported that, for those  whether the investments complied with the business-process  reengineering requirement. Consistent with the guidance, DOD and the  military departments completed questionnaires to help them identify and  develop approaches to streamlining and improving existing business  processes. Once these assessments had been completed, the  appropriate authorities asserted that business-process reengineering  assessments had been performed.
We also reported in June 2011 that while DOD and the military  departments largely followed DOD’s guidance, they did not perform the  key step of validating the results of these reengineering assessments to  ensure that they, among other things, accurately assessed process  weaknesses and identified opportunities to streamline and improve  affected processes. The reason DOD did not follow key aspects of the  certification process—primarily not validating assessment results—was  attributed in part to unclear roles and responsibilities. According to military  department officials responsible for the investments we reviewed,  validation activities did not occur because DOD policy and guidance did  not explicitly require them to be performed. In addition, there was no  guidance that specified how assessments should be validated. According  to DOD officials, the oversight and designated approval authorities did not  validate the DOD level assessments and assertions because DOD policy  and guidance had not yet been revised to require these authorities to do  so. We have work underway to evaluate DOD’s efforts to improve its  business system investment process, including its efforts to address the  act’s business process reengineering requirement. GAO has made prior  recommendations to address these issues. DOD has agreed with these  recommendations and is taking corrective actions in response.
section_title: Concluding Observations
paragraphs: In closing, DOD has demonstrated leadership and sustained commitment  since the first issuance of its FIAR Plan in 2005 and through  improvements and responsiveness to our recommendations since then.  DOD has made progress through the FIAR Guidance, with the  development of a methodology for implementing the FIAR strategy. Full  compliance with the guidance can provide a consistent, systematic  process to help DOD components achieve and verify audit readiness.  Without full compliance, as we have seen in our work, components may  assert audit readiness while process deficiencies prevent validation,  require corrective actions, and delay an audit for another fiscal year.
Automated information systems are essential for modern accounting and  recordkeeping. DOD is developing its ERP systems as the backbone of  its financial management improvement and they are critical for  transforming its business operations. To be fully successful,  implementation of ERP systems should be consistent with an effective  corporate enterprise architecture and the development of streamlined  business processes. DOD officials have stated that these systems are  critical to ensuring that the department meets its mandated September  30, 2017, goal to have auditable departmentwide financial statements.  However, implementation has been delayed by deficiencies in  performance and the need for remedial corrective actions. DOD  components will evaluate cost-effective modifications to legacy systems  and implement any necessary changes. According to DOD officials, for  the ERP systems that will not be fully deployed prior to the audit  readiness goals, the DOD components will need to identify effective  workaround processes or modifications to legacy systems that will enable  audit readiness.
DOD faces considerable implementation challenges and has much work  to do if it is to meet the goals of an auditable SBR by fiscal year 2014 and  a complete set of auditable financial statements by fiscal year 2017. It is  critical that DOD continue to build on its current initiatives. Oversight and  monitoring will also play a key role in making sure that DOD’s plans are  implemented as intended and that lessons learned are identified and  effectively disseminated and addressed. Absent continued momentum  and necessary future investments, the current initiatives may falter,  similar to previous well-intended, but ultimately failed, efforts.
We will continue to monitor the progress and provide feedback on the  status of DOD’s financial management improvement efforts. We currently  have work in progress to assess (1) the FIAR Plan’s risk management  process for identifying, assessing, and addressing risks that may impede  DOD’s ability to achieve the 2017 financial audit readiness goal; (2)  DOD’s funds control in relation to the reliability of its financial statements;  (3) the schedule and cost of Army’s GCSS; (4) components’ efforts to  prepare for SBR and full financial statement audits; and (5) DOD’s actions  in response to our recommendations. 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.
Chairman McCaskill, Ranking Member Ayotte, and members of the  subcommittee, this completes my prepared statement. I would be pleased  to respond to any questions that you may have at this time.
section_title: GAO Contacts and Staff Acknowledgments
paragraphs: If you or your staff have any questions about this testimony please  contact me at (202) 512-9869 or khana@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this testimony. GAO staff who made key contributions to  this testimony include Valerie Melvin, Director; Cindy Brown Barnes,  Assistant Director; Mark Bird, Assistant Director; Kristi Karls; Michael  Holland, Chris Yfantis, and Maxine Hattery.
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