DOD Financial Management: Important Steps Underway But Reform Will Require a Long-term Commitment
Published: 2002-06-04T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The Department of Defense (DOD) faces complex financial and management problems that are deeply rooted in DOD's business operations and management culture. During the past 12 years, DOD has begun several broad-based departmentwide reform efforts to overhaul its financial operations and other key business areas. These efforts have been unsuccessful. GAO identified several key elements that are essential to the success of any DOD financial management reform effort. These include (1) addressing the department's financial management challenges as part of a comprehensive, integrated, DOD-wide business reform; (2) providing for sustained leadership and resource control to implement needed reforms; (3) establishing clear lines of responsibility, authority, and accountability for such reform; (4) incorporating results-oriented performance measures and monitoring tied to the reforms; (5) providing appropriate incentives or consequences for action or inaction; (6) establishing and implementing an enterprise architecture to guide and direct financial management and modernization investments, and (7) ensuring effective oversight and monitoring.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss financial management at the  Department of Defense (DOD).  Today, DOD faces financial and related  management problems that are pervasive, complex, long-standing, and  deeply rooted in virtually all business operations throughout the  department.  DOD’s financial management deficiencies, taken together,  represent the single largest obstacle to achieving an unqualified opinion on  the U.S. government’s consolidated financial statements.  To date, none of  the military services or major DOD components has passed the test of an  independent financial audit because of weaknesses in financial  management systems, operations, and controls.
Overhauling DOD’s financial management represents a major challenge  that goes far beyond financial accounting to the very fiber of the  department’s range of business operations and management culture.   Previous administrations have tried to address these problems in various  ways but have been unsuccessful.  In this regard, on September 10, 2001,  Secretary of Defense Rumsfeld announced a broad initiative intended to  “transform the way the department works and what it works on” which he  estimated could save 5 percent of DOD’s budget—or about $15 billion to  $18 billion annually.  Secretary Rumsfeld recognized that transformation  would be difficult and expected the needed changes would take 8 or more  years to complete.  Our experience with other federal agency business  transformation efforts supports the Secretary’s position.
The President has made financial management and the use of technology  integral to his fiscal year 2002 Management Agenda for making the federal  government more focused on citizens and results.  The President’s  Management Agenda notes, “Without accurate and timely information, it is  not possible to accomplish the President’s agenda to secure the best  performance and highest measure of accountability for the American  people.”
With the events of September 11, and the federal government’s short- and  long-term budget challenges, it is more important than ever that DOD  effectively transform its business operations to ensure that it gets the most  from every dollar spent.  The department must be able to effectively carry  out its stewardship responsibilities for the funding it receives and for the  vast amount of equipment and inventories used in support of military  operations.  Even before the events of September 11, increased  globalization, changing security threats, and rapid technological advances  were prompting fundamental changes in the environment in which DOD  operates.  These trends place a premium on increasing strategic planning,  enhancing results orientation, ensuring effective accountability,  maintaining transparency, and using integrated approaches.  Of the 22  areas on GAO’s governmentwide “high-risk” list, 6 are DOD program areas,  and DOD shares responsibility for 2 other high-risk areas that are  government wide in scope.  Central to effectively addressing DOD’s  financial management problems will be the understanding that these eight  areas are interrelated and cannot be addressed in an isolated, stovepiped,  or piecemeal fashion.
The excellence of our military forces is unparalleled.  This same level of  excellence is not yet evident in the department’s financial management and  other related business areas.  This is particularly problematic because  effective financial and related management operations are critical to  achieving the department’s mission in a reasonably economical, efficient,  and effective manner and to providing reliable, timely financial information  on a routine basis to support management decision making at all levels  throughout DOD.  Transforming DOD’s business operations would free up  resources that could be used to enhance readiness, improve the quality of  life for our troops and their families, and reduce the gap between “wants”  and available funding in connection with major weapon systems.
Today, we will provide our perspectives on the (1) department’s long- standing inability to effectively reform its financial management and other  business systems and processes and (2) keys to successfully carrying out  the Secretary’s business process transformation.  Last summer, the  Comptroller General shared a business transformation paper with  Secretary Rumsfeld and Comptroller Zakheim.  This paper provided an  overview of our views on the challenges facing the department, the keys to  effective reform, and detailed one option for addressing these challenges.  Our testimony today highlights the keys to success included in that paper.
subsections: section_title: Long-standing Financial Management Problems and Attempts at Reform
paragraphs: History is a good teacher.  To solve the problems of today, it is important to  avoid repeating past mistakes.  Over the past 12 years, the department has  initiated several broad-based departmentwide reform efforts intended to  fundamentally reform its financial operations as well as other key business  areas, including the Defense Reform Initiative, the Defense Business  Operations Fund, and the Corporate Information Management initiative.   These efforts, which are highlighted below, have proven to be unsuccessful  despite good intentions and significant effort.  The conditions that led to  these previous attempts at reform remain largely unchanged today.
Defense Reform Initiative (DRI).  In announcing the DRI program in  November 1997, the then Secretary of Defense stated that his goal was “to  ignite a revolution in business affairs.”  DRI represented a set of proposed  actions aimed at improving the effectiveness and efficiency of DOD’s  business operations, particularly in areas that had been long-standing  problems—including financial management.  In July 2000, we reported  that while DRI got off to a good start and made progress in implementing  many of the component initiatives, it did not meet expected time frames  and goals, and the extent to which savings from these initiatives would be  realized was yet to be determined.  We noted that a number of barriers had  kept the department from meeting its specific time frames and goals.  The  most notable barrier was institutional resistance to change in an  organization as large and complex as DOD, particularly in such areas as  acquisition, financial management, and logistics, which transcend most of  the department’s functional organizations and have been long-standing  management concerns.  We also pointed out that DOD did not have a clear  road map to ensure that the interrelationships between its major reform  initiatives were understood and addressed and that it was investing in its  highest priority requirements. We are currently examining the extent to  which DRI efforts begun under the previous administration are continuing.
Defense Business Operations Fund.   In October 1991, DOD established  a new entity, the Defense Business Operations Fund by consolidating nine  existing industrial and stock funds and five other activities operated  throughout DOD.  Through this consolidation, the fund was intended to  bring greater visibility and management to the overall cost of carrying out  certain critical DOD business operations.  However, from its inception, we  reported that the fund did not have the policies, procedures, and financial  systems to operate in a businesslike manner.  In 1996, DOD announced the  fund’s elimination.  In its place, DOD established four working capital  funds.  DOD estimated that for fiscal year 2003 these funds would account  for and control about $75 billion.  These new working capital funds  inherited their predecessor’s operational and financial reporting problems.  Our reviews of these funds have found that they still are not in a position to  provide accurate and timely information on the results of operations.  As a  result, working capital fund customers cannot be assured that the prices  they are charged for goods and services represent actual costs.
Corporate Information Management (CIM).  The CIM initiative began  in 1989 and was expected to save billions of dollars by streamlining  operations and implementing standard information systems to support  common business operations.  CIM was expected to reform all of DOD’s  functional areas—including finance, procurement, material management,  and human resources—through consolidating, standardizing, and  integrating information systems.  DOD also expected CIM to replace  approximately 2,000 duplicative systems.  Over the years, we made  numerous recommendations to improve CIM’s management to help  preclude the wasteful use and mismanagement of billion of dollars.   However, these recommendations were generally not addressed.  Instead,  DOD spent billions of dollars with little sound analytical justification.   Rather than relying on a rigorous decision-making process for information  technology investments—as used in leading private and public  organizations we studied, DOD made systems decisions without (1) appropriately analyzing cost, benefits, and technical risks;  (2) establishing realistic project schedules; or (3) considering how business  process improvements could affect information technology investments.   For one effort alone, DOD spent about $700 million trying to develop and  implement a single system for the material management business area— but this effort proved unsuccessful.  We reported in 1997 that the benefits  of CIM had yet to be widely achieved after 8 years of effort and spending  about $20 billion.  The CIM initiative was eventually abandoned.
DOD’s long-standing financial management difficulties have adversely  affected the department’s ability to control costs, ensure basic  accountability, anticipate future costs and claims on the budget (such as for  health care, weapon systems, and environmental liabilities), measure  performance, maintain funds control, prevent fraud, and address pressing  management issues.
In this regard, I would like to briefly highlight three of our recent products  that exemplify the adverse impact of DOD’s reliance on fundamentally  flawed financial management systems and processes and a weak overall  internal control environment.
In March of this year, we testified on the continuing problems with  internal controls over approximately $64 million in fiscal year 2001  purchase card transactions involving two Navy activities.  Consistent  with our testimony last July on fiscal year 2000 purchase card  transactions at these locations, our follow-up review demonstrated that  continuing control problems contributed to fraudulent, improper, and  abusive purchases and theft and misuse of government property.  We are  currently auditing purchase and travel card usage across the  department.
In July 2001, we reported that DOD did not have adequate systems,  controls, and managerial attention to ensure that the $2.7 billion of  adjustments affecting closed appropriation accounts made during fiscal  year 2000 were legal and otherwise proper. Our review of $2.2 billion of  these adjustments found about $615 million (28 percent) of the  adjustments should not have been made, including about $146 million  that violated specific provisions of appropriations law and were thus  illegal. For example, the stated purpose of one adjustment was to charge  a $79 million payment made in February 1999 to a fiscal year 1992  research and development appropriation account to correct previous  payment recording errors. However, the fiscal year 1992 research and  development appropriation account closed at the end of fiscal year  1998—4 months before the $79 million payment was made.  Therefore,  the adjustment had the same effect as using canceled funds from a  closed appropriation account to make the February 1999 expenditure,  which is prohibited by the 1990 law.  As of April 2002, DOD had reversed  140 of the 162 transactions and provided additional contract  documentation for the remaining 22 transactions.  However, DOD has  yet to complete the reconciliation for the contracts associated with  these adjustments and make the correcting entries.  DOD has indicated  that it will be later this year before the correct entries are made.
In June 2001, we reported that DOD’s financial systems could not  adequately track and report on whether the $1.1 billion in earmarked  funds that the Congress provided to DOD for spare parts and associated  logistical support were actually used for their intended purpose. The  vast majority of the funds—92 percent—were transferred to the military  services operation and maintenance accounts.  Once the funds were  transferred into the operation and maintenance accounts, the  department could not separately track the use of the funds.  As a result,  DOD lost its ability to assure the Congress that the funds it received for  spare parts purchases were used for, and only for, that purpose.
Problems with the department’s financial management operations go far  beyond its accounting and finance systems and processes.  The department  continues to rely on a far-flung, complex network of finance, logistics,  personnel, acquisition, and other management information systems—80  percent of which are not under the control of the DOD Comptroller—to  gather the financial data needed to support the day-to-day management  decision making.  This network was not designed to be, but rather has  evolved into, the overly complex and error-prone operation that exists  today, including (1) little standardization across DOD components,  (2) multiple systems performing the same tasks, (3) the same data stored in  multiple systems, (4) manual data entry into multiple systems, and (5) a  large number of data translations and interfaces that combine to  exacerbate problems with data integrity.
Many of the department’s business operations are mired in old, inefficient  processes and legacy systems, some of which go back to the 1950s and  1960s.  For example, the department still relies on the Mechanization of  Contract Administration Services (MOCAS) system—which dates back to  1968—to process a substantial portion of the contract payment  transactions for all DOD organizations.  In fiscal year 2001, MOCAS  processed an estimated $78 billion in contract payments.  Past efforts to  replace MOCAS have failed and the current effort has been delayed.  As a  result, for the foreseeable future, DOD will continue to be saddled with  MOCAS.
In the 1970s, we issued numerous reports detailing serious problems with  the department’s financial management operations.  Between 1975 and  1981, we issued more than 75 reports documenting serious problems with  DOD’s cost, property, fund control, and payroll accounting systems.  In the  1980s, we found that despite the billions of dollars invested in individual  systems, these efforts, too, fell far short of the mark, with extensive  schedule delays and cost overruns.  For example, our 1989 report on eight  major DOD system development efforts—including two major accounting  systems—under way at that time, showed that system development cost  estimates doubled, two of the eight efforts were abandoned, and the  remaining six efforts experienced delays of 3 to 7 years.
Two recent specific system endeavors that have fallen short of their  intended goals are the Standard Procurement System and the Defense Joint  Accounting System.  Both of these efforts were aimed at improving the  department’s financial management and related business operations.
Standard Procurement System (SPS).  In November 1994, DOD began  the SPS program to acquire and deploy a single automated system to  perform all contract management-related functions within DOD’s  procurement process for all DOD organizations and activities.  The  laudable goal of SPS was to replace 76 existing procurement systems with a  single departmental system.  DOD estimated that SPS had a life-cycle cost  of approximately $3 billion over a 10-year period.  According to DOD, SPS  was to support about 43,000 users at over 1,000 sites worldwide and was to  interface with key financial management functions such as payment  processing.  Additionally, SPS was intended to replace the contract  administration functions currently performed by MOCAS.  Our July 2001  report and February 2002 testimony before this Subcommittee identified  weaknesses in the department’s management of its investment in SPS.   Specifically:  The department had not economically justified its investment in the  program because its latest (January 2000) analysis of costs and benefits  was not credible. Further, this analysis showed that the system, as  defined, was not a cost-beneficial investment.
The department was not accumulating actual program costs and  therefore, did not know the total amount spent on the program to date,  yet life-cycle cost projections had grown from about $3 billion to $3.7  billion.
Although the department committed to fully implementing the system  by March 31, 2000, this target date had slipped by over 3 ½ years to  September 30, 2003, and program officials have recently stated that this  date will also not be met.
We recommended that the Secretary of Defense make additional  investments in SPS conditional upon first demonstrating that the existing  version of SPS is producing benefits that exceed costs and that future  investment decisions, including those regarding operations and  maintenance beyond fiscal year 2001, be based on complete and reliable  economic justifications.
Defense Joint Accounting System (DJAS).  In 1997, DOD selected  DJAS to be one of three general fund accounting systems.  As originally  envisioned, DJAS would perform the accounting for the Army and the Air  Force as well as the DOD transportation and security assistance areas.   Subsequently, in February 1998, Defense Finance and Accounting Service  (DFAS) decided that the Air Force could withdraw from using DJAS.  DFAS  made the decision because either the Air Force processes or the DJAS  processes would need significant reengineering to allow for the  development of a joint accounting system.  As a result, the Air Force was  allowed to start development of its own general fund accounting system— General Fund and Finance System—which resulted in the development of a  fourth general fund accounting system.
In June 2000, the DOD Inspector General reported that DFAS was  developing DJAS at an estimated life-cycle cost of about $700 million  without demonstrating that the program was the most cost-effective  alternative for providing a portion of DOD’s general fund accounting. More  specifically, the report stated that DFAS had not developed a complete or  fully supportable feasibility study, analysis of alternatives, economic  analysis, acquisition program baseline, or performance measures, and had  not reengineered business processes. According to data provided by DFAS,  for fiscal years 1997-2000 approximately $120 million was spent on the  development and implementation of DJAS. However, today DJAS is only  being operated at two locations—Ft. Benning, Georgia, and the Missile  Defense Agency.  According to a DFAS official, DJAS is considered to be  fully deployed—which means it is operating at all intended locations.
Significant resources—in terms of dollars, time, and people—have been  invested in these two efforts, without demonstrated improvement in DOD’s  business operations.  It is essential that DOD ensure that its investment in  systems modernization results in more effective and efficient business  operations, since every dollar spent on ill-fated efforts such as SPS and  DJAS is one less dollar available for other defense spending priorities.
section_title: Underlying Causes of Financial and Related Business Process Reform Challenges
paragraphs: As part of our constructive engagement approach with DOD, the  Comptroller General met with Secretary Rumsfeld last summer to provide  our perspectives on the underlying causes of the problems that have  impeded past reform efforts at the department and to discuss options for  addressing these challenges.  There are four underlying causes:  a lack of sustained top-level leadership and management accountability   deeply embedded cultural resistance to change, including military  service parochialism and stovepiped operations;   a lack of results-oriented goals and performance measures and   inadequate incentives for seeking change.
subsections: section_title: Lack of Sustained Leadership and Accountability
paragraphs: Historically, DOD has not routinely assigned accountability for  performance to specific organizations or individuals who have sufficient  authority to accomplish desired goals.  For example, under the CFO Act, it  is the responsibility of agency CFOs to establish the mission and vision for  the agency’s future financial management.  However, at DOD, the  Comptroller—who is by statute the department’s CFO—has direct  responsibility for only an estimated 20 percent of the data relied on to carry  out the department’s financial management operations.
The department has learned through its efforts to meet the Year 2000  computing challenge that to be successful, major improvement  initiatives must have the direct, active support and involvement of the  Secretary and Deputy Secretary of Defense.  In the Year 2000 case, the  then Deputy Secretary of Defense was personally and substantially  involved and played a major role in the department’s success.  Such top- level support and attention helps ensure that daily activities throughout  the department remain focused on achieving shared, agencywide  outcomes.  A central finding from our report on our survey of best  practices of world-class financial management organizations—Boeing;  Chase Manhattan Bank; General Electric; Pfizer; Hewlett-Packard;  Owens Corning; and the states of Massachusetts, Texas, and Virginia— was that clear, strong executive leadership was essential to (1) making  financial management an entitywide priority, (2) redefining the role of  finance, (3) providing meaningful information to decision makers, and  (4) building a team of people that delivers results.
DOD’s past experience has suggested that top management has not had a  proactive, consistent, and continuing role in building capacity, integrating  daily operations for achieving performance goals, and creating incentives.   Sustaining top management commitment to performance goals is a  particular challenge for DOD.  In the past, the average 1.7-year tenure of the  department’s top political appointees has served to hinder long-term  planning and follow-through.
section_title: Cultural Resistance and Parochialism
paragraphs: Cultural resistance to change and military service parochialism have also  played a significant role in impeding previous attempts to implement  broad-based management reforms at DOD.  The department has  acknowledged that it confronts decades-old problems deeply grounded in  the bureaucratic history and operating practices of a complex, multifaceted  organization, and that many of these practices were developed piecemeal  and evolved to accommodate different organizations, each with its own  policies and procedures.
For example, as discussed in our July 2000 report, the department  encountered resistance to developing departmentwide solutions under the  then Secretary’s broad-based DRI. In 1997, the department established a  Defense Management Council—including high-level representatives from  each of the military services and other senior executives in the Office of the  Secretary of Defense—which was intended to serve as the “board of  directors” to help break down organizational stovepipes and overcome  cultural resistance to change called for under DRI.  However, we found that  the council’s effectiveness was impaired because members were not able to  put their individual military services’ or DOD agencies’ interests aside to  focus on departmentwide approaches to long-standing problems.
Cultural resistance to change has impeded reforms not only in financial  management, but also in other business areas, such as weapon system  acquisition and inventory management.  For example, as we reported last  year, while the individual military services conduct considerable analyses  justifying major acquisitions, these analyses can be narrowly focused and  do not consider joint acquisitions with the other services.  In the inventory  management area, DOD’s culture has supported buying and storing  multiple layers of inventory rather than managing with just the amount of  stock needed.
section_title: Unclear Goals and Performance Measures
paragraphs: DOD’s past reform efforts have been handicapped by the lack of clear,  linked goals and performance measures.  As a result, DOD managers lack  straightforward road maps showing how their work contributes to  attaining the department’s strategic goals, and they risk operating  autonomously rather than collectively.  In some cases, DOD had not yet  developed appropriate strategic goals, and in other cases, its strategic goals  and objectives were not linked to those of the military services and defense  agencies.
As part of our assessment of DOD’s Fiscal Year 2000 Financial  Management Improvement Plan, we reported that, for the most part, the  plan represented the military services’ and defense components’  stovepiped approaches to reforming financial management and did not  clearly articulate how these various efforts would collectively result in an  integrated DOD-wide approach to financial management improvement.  In  addition, we reported that the department’s plan did not include  performance measures that could be used to assess DOD’s progress in  resolving its financial management problems.  DOD officials have informed  us that they are now working to revise the department’s approach to this  plan so that future years’ updates will reflect a more strategic,  departmentwide vision and provide a more effective tool for financial  management reform.
As it moves to modernize its systems, the department faces a formidable  challenge in responding to technological advances that are changing  traditional approaches to business management. For fiscal year 2003,  DOD’s information technology budgetary request of approximately $26  billion will support a wide range of military operations as well as DOD  business functions.  As we have reported, while DOD plans to invest  billions of dollars in modernizing its financial management and other  business support systems, it does not yet have an overall blueprint—or  enterprise architecture—in place to guide and direct these investments.  As  we recently testified, our review of practices at leading organizations  showed they were able to make sure their business systems addressed  corporate—rather than individual business unit—objectives by using  enterprise architectures to guide and constrain investments.  Consistent  with our recommendation, DOD is now working to develop a financial  management enterprise architecture, which is a very positive development.
section_title: Lack of Incentives for Change
paragraphs: The final underlying cause of the department’s long-standing inability to  carry out needed fundamental reform has been the lack of incentives for  making more than incremental change to existing “business-as-usual”  processes, systems, and structures.  Traditionally, DOD has focused on  justifying its need for more funding rather than on the outcomes its  programs have produced.  DOD generally measures its performance by the  amount of money spent, people employed, or number of tasks completed.   Incentives for its decision makers to implement changed behavior have  been minimal or nonexistent.  Secretary Rumsfeld perhaps said it best in  announcing his planned transformation at DOD: “There will be real  consequences from, and real resistance to, fundamental change.”
This lack of incentive has perhaps been most evident in the department’s  acquisition area.  In DOD’s culture, the success of a manager’s career has  depended more on moving programs and operations through the DOD  process than on achieving better program outcomes.  The fact that a given  program may have cost more than estimated, taken longer to complete, and  not generated results or performed as promised was secondary to fielding a  new program.  To effect real change, actions are needed to (1) break down  parochialism and reward behaviors that meet DOD-wide and congressional  goals; (2) develop incentives that motivate decision makers to initiate and  implement efforts that are consistent with better program outcomes,  including saying “no” or pulling the plug on a system or program that is  failing; and (3) facilitate a congressional focus on results-oriented  management, particularly with respect to resource-allocation decisions.
section_title: Independent Assessment Calls for the Reform of DOD’s Financial Operations
paragraphs: Recognizing the need for improved financial data to effectively manage the  department’s vast operations, Secretary Rumsfeld commissioned an  independent study to recommend a strategy for financial management  improvements.  The report recognized that the department would have to  undergo “a radical financial management transformation” and that it would  take more than a decade to achieve.  The report also noted that DOD’s  current financial, accounting, and feeder systems do not provide relevant,  reliable, and timely information.  Further, the report pointed out that the  “support of management decision-making” is generally not an objective of  the financially based information currently developed or planned for future  development.  Additionally, the report stated that although the department  had numerous system projects underway, they were narrowly focused,  lacked senior management leadership, and were not part of an integrated  DOD-wide strategy.  The report also noted that the systemic problems  discussed were not strictly financial management problems and could not  be solved by DOD’s financial community.  Rather, the solution would  require the “concerted effort and cooperation of cross-functional  communities throughout the department.”
The report recommended an integrated approach to transform the  department’s financial operations.  The report noted that its proposed  framework would take advantage of certain ongoing improvement actions  within the department and provide specific direction for a more  coordinated, managed, and results-oriented approach.  The proposed  course of action for transforming the department’s financial management  centered around six broad elements: (1) leadership, (2) incentives, (3)  accountability, (4) organizational alignment, (5) changes in certain rules,  and (6) changes in enterprise practices.
The report referred to its approach as a “twin-track” course of action.  The  first track employs a DOD-wide management approach to developing  standard integrated systems; obtaining relevant, reliable, and timely  financial data; and providing incentives for the department to utilize  financial data in an efficient and effective way.  This track will require a  longer time frame and will include establishing a centralized oversight  process under the DOD Comptroller for incrementally implementing the  recommended structural changes and developing standard, integrated  financial systems.
The second track focuses on targeting, selecting, and overseeing  implementation of a limited number of intraservice/cross-service projects  for major cost savings or other high-value benefits under a process led by  the DOD Comptroller and assisting the Secretary of Defense in establishing  and managing a set of metrics.  Prime tools of such improvements would  include activity-based costing and benchmarking/best practices analysis to  identify cost-saving opportunities.
A July 19, 2001, departmental memorandum from Secretary Rumsfeld  confirmed that the department needs to develop and implement an  architecture for achieving integrated financial and accounting systems in  order to generate relevant, reliable, and timely information on a routine  basis.  Secretary Rumsfeld further reiterated the need for a fundamental  transformation of DOD in his “top-down” Quadrennial Defense Review.   Specifically, his September 30, 2001, Quadrennial Defense Review Report  concluded that the department must transform its outdated support  structure, including decades-old financial systems that are not well  interconnected.  The report summed up the challenge well in stating:  “While America’s businesses have streamlined and adopted new business  models to react to fast-moving changes in markets and technologies, the  Defense Department has lagged behind without an overarching strategy to  improve its business practices.”
section_title: Keys to Fundamental DOD Financial Management Reform
paragraphs: Our experience has shown there are several key elements that collectively  would enable the department to effectively address the underlying causes  of its inability to resolve its long-standing financial management problems.   For the most part these elements are consistent with those discussed in the  department’s April 2001 financial management transformation report.  These elements, which we believe are key to any successful approach to  financial management reform, include   addressing the department’s financial management challenges as part of  a comprehensive, integrated, DOD-wide business reform;  providing for sustained leadership by the Secretary of Defense and  resource control to implement needed financial management reforms;  establishing clear lines of responsibility, authority, and accountability  for such reform tied to the Secretary;  incorporating results-oriented performance measures and monitoring  tied to financial management reforms;  providing appropriate incentives or consequences for action or inaction;  establishing and implementing an enterprise architecture to guide and  direct financial management modernization investments; and   ensuring effective oversight and monitoring.
Actions on many of the key areas central to successfully achieving desired  financial management and related business transformation goals— particularly those that rely on longer term systems improvements—will  take a number of years to fully implement.  Secretary Rumsfeld has  estimated that his envisioned transformation may take 8 or more years to  complete.  Our research and experience with other federal agencies have  shown that this is not an unrealistic estimate.  Additionally, these keys  should not be viewed as independent actions, but rather, a set of  interrelated and interdependent actions that are collectively critical to  transforming DOD’s business operations.
Consequently, both long-term actions focused on the Secretary’s envisioned  business transformation and short-term actions focused on improvements  within existing systems and processes will be critical going forward.  Short- term actions in particular will be critical if the department is to achieve the  greatest possible accountability over existing resources and more reliable  data for day-to-day decision making while longer term systems and  business process reengineering efforts are under way. Beginning with the  Secretary’s recognition of a need for a fundamental transformation of the  department’s business operations and building on some of the work begun  under past administrations, DOD has taken a number of positive steps in  many of these key areas, but these steps are only a beginning.  Challenges  remain in each of these key areas that are formidable.
subsections: section_title: Integrated Business Reform Strategy
paragraphs: As we previously reported, establishing the right goal is essential for  success.  Central to effectively addressing DOD’s financial management  problems will be the recognition that they cannot be addressed in an  isolated, stovepiped, or piecemeal fashion separate from the other high-risk  areas facing the department.  Further, successfully reforming the  department’s operations—which consist of people, business processes, and  technology—will be critical if DOD is to effectively address the deep- rooted organizational emphasis on maintaining business-as-usual across  the department.
Financial management is a crosscutting issue that affects virtually all of  DOD’s business areas.  For example, improving its financial management  operations so that they can produce timely, reliable, and useful cost  information is essential to effectively measure its progress toward  achieving many key outcomes and goals across virtually the entire  spectrum of DOD’s business operations.  At the same time, the  department’s financial management problems—and, most importantly, the  keys to their resolution—are deeply rooted in and dependent upon  developing solutions to a wide variety of management problems across  DOD’s various organizations and business areas.  For example, we have  reported that many of DOD’s financial management shortcomings were  attributable in part to human capital issues.  The department does not yet  have a strategy in place for improving its financial management human  capital.  This is especially critical in connection with DOD’s civilian  workforce, since DOD has generally done a much better job in conjunction  with human capital planning for its military personnel.  In addition, DOD’s  civilian personnel face a variety of size, shape, skills, and succession- planning challenges that need to be addressed.
As we mentioned earlier, and it bears repetition, the department has  reported that an estimated 80 percent of the data needed for sound  financial management comes from its other business operations, such as its  acquisition and logistics communities.  DOD’s vast array of costly,  nonintegrated, duplicative, and inefficient financial management systems is  reflective of its lack of an integrated approach to addressing management  challenges.  DOD has acknowledged that one of the reasons for the lack of  clarity in its reporting under the Government Performance and Results Act  has been that most of the program outcomes the department is striving to  achieve are interrelated, while its management systems are not integrated.
As we discussed previously, the Secretary of Defense has made the  fundamental transformation of business practices throughout the  department a top priority.  In this context, the Secretary established a  number of top-level committees, councils, and boards, including the Senior  Executive Committee, Business Initiative Council, and Defense Business  Practices Implementation Board.  The Senior Executive Committee was  established to help guide efforts across the department to improve its  business practices.  This committee—chaired by the Secretary of Defense,  and with membership to include the Deputy Secretary, the military service  secretaries, and the Under Secretary of Defense for Acquisition,  Technology and Logistics—was established to function as the “board of  directors” for the department.  The Business Initiative Council— comprising the military service secretaries and headed by the Under  Secretary of Defense for Acquisition, Technology and Logistics—was  established to encourage the military services to explore new money- saving business practices to help offset funding requirements for  transformation and other initiatives.
Our research of successful public and private sector organizations shows  that such entities, comprised of enterprisewide executive leadership,  provide valuable guidance and direction when pursuing integrated  solutions to corporate problems.  Inclusion of the department’s top  leadership should help to break down the cultural barriers to change and  result in an integrated DOD approach for business reform.
section_title: Sustained Leadership and Resource Control
paragraphs: The department’s successful Year 2000 effort illustrated, and our survey of  leading financial management organizations captured, the importance of  strong leadership from top management.  As we have stated many times  before, strong, sustained executive leadership is critical to changing a  deeply rooted corporate culture—such as the existing “business-as-usual”  culture at DOD—and to successfully implementing financial management  reform.  In the case of the Year 2000 challenge the personal, active  involvement of the Deputy Secretary of Defense played a key role in  building entitywide support and focus.  Given the long-standing and deeply  entrenched nature of the department’s financial management problems— combined with the numerous competing DOD organizations, each  operating with varying, often parochial views and incentives—such visible,  sustained top-level leadership will be critical.
In discussing their April 2001 report to the Secretary of Defense on  transforming financial management, the authors stated that, “unlike  previous failed attempts to improve DOD’s financial practices, there is a  new push by DOD leadership to make this issue a priority.”  Strong,  sustained executive leadership—over a number of years and  administrations—will be key to changing a deeply rooted culture.  In  addition, given that significant investments in information systems and  related processes have historically occurred in a largely decentralized  manner throughout the department, additional actions will likely be  required to implement centralized information technology investment  control.
In our May 2001 report we recommended that DOD take action to provide  senior departmental commitment and leadership through establishment of  a enterprisewide steering committee sponsored by the Secretary, that could  guide development of a transformation blueprint and provide for  centralized control over investments to ensure funding is provided for only  those proposed investments in systems and business reforms that are  consistent with the blueprint.  Absent such a control, DOD runs the serious  risk that the fiscal year 2003 information technology budgetary request of  approximately $26 billion and future years’ requests will not result in  marked improvement in DOD’s business operations.  Without such an  approach, DOD runs the risk of spending billions of dollars on systems  modernization, which continues to perpetuate the existing systems  environment that suffers from duplication of systems, limited  interoperability, and unnecessarily costly operations and maintenance and  will preclude DOD from achieving the Secretary’s vision of improved  financial information on the results of departmental operations.
Additionally, as previously discussed, the tenure of the department’s top  political appointees has generally been short in duration and as a result it is  sometimes difficult to maintain the focus and momentum that is needed to  resolve the management challenges facing DOD.  The resolution of the  array of interrelated business system management challenges previously  discussed is likely to require a number of years and therefore span several  administrations.  The Comptroller General has proposed in congressional  testimony that one option to consider to address the continuity issue would  be the establishment of the position of chief operating officer.  This  position could be filled by an individual appointed for a set term of 5 to 7  years with the potential for reappointment.  Such an individual should have  a proven track record as a business process change agent for large, diverse  organizations and would spearhead business process transformation  across the department.
section_title: Clear Lines of Responsibility and Accountability
paragraphs: Last summer, when the Comptroller General met with Secretary Rumsfeld,  he stressed the importance of establishing clear lines of responsibility,  decision-making authority, and resource control for actions across the  department tied to the Secretary as a key to reform.  As we previously  reported, such an accountability structure should emanate from the  highest levels and include the secretary of each of the military services as  well as heads of the department’s various major business areas.
The Secretary of Defense has taken action to vest responsibility and  accountability for financial management modernization with the DOD  Comptroller.   In October 2001, the DOD Comptroller, as previously  mentioned, established the Financial Management Modernization  Executive and Steering Committees as the governing bodies that oversee  the activities related to this modernization effort and also established a  supporting working group to provide day-to-day guidance and direction in  these efforts.  DOD reports that the executive and steering committees met  for the first time in January 2002.  At the request of the Subcommittee on  Readiness and Management Support, Senate Committee on Armed  Services, we are initiating a review of the department’s efforts to develop  and implement an enterprise architecture.  As part of the effort, we will be  assessing the department’s efforts to align current investments in financial  systems with the proposed architecture.
It is clear to us that the DOD Comptroller has the full support of the  Secretary and that the Secretary is committed to making meaningful  change.  The key is to translate this support into a funding control  mechanism that ensures DOD’s components information technology  investments are aligned with the department’s strategic blueprint.   Addressing issues such as centralization of authority for information  systems investments and continuity of leadership is critical to successful  business transformation.   To make this work, it is important that the DOD  Comptroller have sufficient authority to oversee the investment decisions  in order to bring about the full, effective participation of the military  services and business process owners across the department.
section_title: Results-oriented Performance
paragraphs: As discussed in our January 2001 report on DOD’s major performance and  accountability challenges, establishing a results orientation is another key  element of any approach to reform.  Such an orientation should draw upon  results that could be achieved through commercial best practices,  including outsourcing and shared servicing concepts.  Personnel  throughout the department must share the common goal of establishing  financial management operations that not only produce financial  statements that can withstand the test of an audit but more importantly,  routinely generate useful, reliable, and timely financial information for day- to-day management purposes.
In addition, we have previously testified that DOD’s financial management  improvement efforts should be measured against an overall goal of  effectively supporting DOD’s basic business processes, including  appropriately considering related business process system  interrelationships, rather than determining system-by-system compliance.   Such a results-oriented focus is also consistent with an important lesson  learned from the department’s Year 2000 experience.  DOD’s initial Year  2000 focus was geared toward ensuring compliance on a system-by-system  basis and did not appropriately consider the interrelationships of systems  and business areas across the department.  It was not until the department,  under the direction of the then Deputy Secretary, shifted to a core mission  and function review approach that it was able to achieve the desired result  of greatly reducing its Year 2000 risk.
Since the Secretary has established an overall business process  transformation goal that will require a number of years to achieve, going  forward it is especially critical for managers throughout the department to  focus on specific metrics that, over time, collectively will translate to  achieving this overall goal.  It is important for the department to refocus its  annual accountability reporting on this overall goal of fundamentally  transforming the department’s financial management systems and related  business processes to include appropriate interim annual measures for  tracking progress toward this goal.
In the short term, it is important to focus on actions that can be taken using  existing systems and processes.  It is critical to establish interim measures  to both track performance against the department’s overall transformation  goals and facilitate near-term successes using existing systems and  processes.  The department has established an initial set of metrics  intended to evaluate financial performance, and it reports that it has seen  improvements.   For example, with respect to closed appropriation  accounts, DOD reported during the first 6 months of fiscal year 2002 a  reduction in the dollar value of adjustments to closed appropriation  accounts of about 80 percent from the same 6-month period in fiscal year  2001.  Other existing metrics concern cash and funds management,  contract and vendor payments, and disbursement accounting. We are  initiating a review of DOD’s short-term financial management performance  metrics and will provide the Subcommittee the results of our review.  DOD  also reported that it is working to develop these metrics into higher-level  measures more appropriate for senior management. We agree with the  department’s efforts to expand the use of appropriate metrics to guide its  financial management reform efforts.
section_title: Incentives and Consequences
paragraphs: Another key to breaking down the parochial interests and stovepiped  approaches that have plagued previous reform efforts is establishing  mechanisms to reward organizations and individuals for behaviors that  comply with DOD-wide and congressional goals.  Such mechanisms should  be geared to providing appropriate incentives and penalties to motivate  decision makers to initiate and implement efforts that result in  fundamentally reformed financial management and other business support  operations.
In addition, such incentives and consequences are essential if DOD is to  break down the parochial interests that have plagued previous reform  efforts.  Incentives driving traditional ways of doing business, for example,  must be changed, and cultural resistance to new approaches must be  overcome.  Simply put, DOD must convince people throughout the  department that they must change from business-as-usual systems and  practices or they are likely to face serious consequences, organizationally  and personally.
section_title: Enterprise Architecture
paragraphs: Enterprise architecture development, implementation, and maintenance  are a basic tenet of effective information technology management. Used in  concert with other information technology management controls, an  architecture can increase the chances for optimal mission performance. We  have found that attempting to modernize operations and systems without  an architecture leads to operational and systems duplication, lack of  integration, and unnecessary expense. Our best practices research of  successful public and private sector organizations has similarly identified  enterprise architectures as essential to effective business and technology  transformation.
Establishing and implementing a financial management enterprise  architecture is essential for the department to effectively manage its  modernization effort.  The Clinger-Cohen Act requires major departments  and agencies to develop, implement, and maintain an integrated  architecture.  As we previously reported, such an architecture can help  ensure that the department invests only in integrated, business system  solutions and, conversely, will help move resources away from non-value- added legacy business systems and nonintegrated business system  development efforts.  Without an enterprise architecture to guide and  constrain information technology investments, DOD runs the serious risk  that its system efforts will perpetuate the existing system environment that  suffers from systems duplication, limited interoperability, and  unnecessarily costly operations and maintenance.
In our May 2001 report, we pointed out that DOD lacks a financial  management enterprise architecture to guide and constrain the billions of  dollars it plans to spend to modernize its financial management operations  and systems. According, we recommended that the department develop  and implement an architecture in accordance with DOD’s policies and  guidance and that senior management be involved in the investment  decision-making process.
DOD has awarded a contract for the development of a DOD-wide financial  management enterprise architecture to “achieve the Secretary’s vision of  relevant, reliable and timely financial information needed to support  informed decision-making.”  In fiscal year 2002, DOD received  approximately $98 million and has requested another $96 million for fiscal  year 2003 for this effort.  Consistent with the recommendations contained  in our January 1999 and May 2001 reports, DOD has begun an extensive  effort to document the department’s current “as-is” financial management  architecture by identifying systems currently relied upon to carry out  financial management operations throughout the department.  To date, the  department has identified over 1,100 systems that are involved in the  processing of financial information.  In developing the “as-is” environment  DOD has recognized that financial management is broader than just  accounting and finance systems.  Rather, it includes the department’s  budget formulation, acquisition, inventory management, logistics,  personnel, and property management systems.
In developing and implementing its enterprise architecture, DOD needs to  ensure that the multitude of systems efforts currently underway are  designed as an integral part of the architecture.  As discussed in our May  2001 report, the Army and the Defense Logistics Agency (DLA) are  investing in financial management solutions that are estimated to cost  about $700 million and $900 million, respectively.  Further, the Naval Audit  Service has reported that the Navy has efforts underway which are  estimated to cost about $2.5 billion.  These programs—commercial  enterprise resource planning (ERP) products—are intended to implement  different commercially available products for automating and  reengineering various operations within the organization.  Among the  functions that these ERP programs address is financial management.   However, since DOD has yet to develop and implement its architecture,  there is no assurance that these separate efforts will result in systems that  are compatible with the DOD designated architecture.  For example, the  Naval Audit Service reported that there are interoperability problems with  the four Navy ERP efforts and the entire program lacks appropriate  management oversight.
The effort to develop a financial management architecture will be further  complicated as the department strives to develop multiple architectures  across its various business areas and organizational components.  For  example, in June 2001, we recommended that the DLA develop an  architecture to guide and constrain its Business Systems Modernization  acquisition.  Additionally, we recommended that the department develop a  DOD-wide logistics management architecture that would promote  interoperability and avoid duplication among the logistics modernization  efforts now under way in DOD component organizations, such as DLA and  the military services.
As previously discussed, control and accountability over investments are  critical.  DOD can ill-afford another CIM, which invested billion of dollars  but did not result in systems that were capable of providing DOD  management and the Congress with more accurate, timely, and reliable  information of the results of the department’s vast operations.  To better  control DOD’s investments we recommended in our May 2001 report, that  until the architecture is developed investments should be limited to  (1) deployment of systems that have already been fully tested and involve  no additional development or acquisition cost, (2) stay-in-business  maintenance needed to keep existing systems operational, (3) management  controls needed to effectively invest in modernized systems, and (4) new  systems or existing system changes that are congressionally directed or are  relatively small, cost effective, and low risk and can be delivered in a  relatively short time frame.
section_title: Monitoring and Oversight
paragraphs: Ensuring effective monitoring and oversight of progress will also be key to  bringing about effective implementation of the department’s financial  management and related business process reform.  We have previously  testified that periodic reporting of status information to department top  management, the Office of Management and Budget (OMB), the Congress,  and the audit community is another key lesson learned from the  department’s successful effort to address its Year 2000 challenge.
Previous submissions of the department’s Financial Management  Improvement Plan have simply been compilations of data call information  on the stovepiped approaches to financial management improvements  received from the various DOD components.  It is our understanding that  DOD plans to change its approach and anchor the plan in the enterprise  architecture.  If the department’s future plans are upgraded to provide a  departmentwide strategic view of the financial management challenges  facing the department, along with planned corrective actions, these plans  can serve as an effective tool not only to help guide and direct the  department’s financial management reform efforts, but also to help  maintain oversight of the department’s financial management operations.   Going forward, this Subcommittee’s oversight hearings, as well as the  active interest and involvement of the defense appropriations and  authorization committees, will continue to be key to effectively achieving  and sustaining DOD’s financial management and related business process  reform milestones and goals.