DOD is one of the largest federal agencies with its budget representing over half of the entire federal government’s discretionary spending. For fiscal year 2010, Congress appropriated over $694 billion for DOD. This included $530 billion in regular appropriations for base needs and about $164 billion in regular and supplemental appropriations for contingency operations in Iraq, Afghanistan, and other locations. As of June 2010, DOD had received about $1 trillion since 2001 to support contingency operations. The department is currently facing near-term and long-term internal fiscal pressures as it attempts to balance competing demands to support ongoing operations, rebuild readiness following extended military operations, and manage increasing personnel and health care costs and significant cost growth in its weapons systems programs. For more than a decade, DOD has dominated GAO’s list of federal programs and operations at high-risk of being vulnerable to fraud, waste, abuse, and mismanagement. In fact, all the DOD programs on GAO’s High- Risk List relate to business operations, including systems and processes related to management of contracts, finances, the supply chain, and support infrastructure, as well as weapon systems acquisition. Long- standing and pervasive weaknesses in DOD’s financial management and related business processes and systems have (1) resulted in a lack of reliable information needed to make sound decisions and report on the financial status and cost of DOD activities to Congress and DOD decision makers; (2) adversely affected its operational efficiency in business areas, such as major weapons system acquisition and support and logistics; and (3) left the department vulnerable to fraud, waste, and abuse. Detailed examples of these effects are presented in appendix I. DOD is required by various statutes to improve its financial management processes, controls, and systems to ensure that complete, reliable, consistent, and timely information is prepared and responsive to the financial information needs of agency management and oversight bodies, and to produce audited financial statements. Collectively these statues required DOD to do the following Establish a leadership and governance framework and process, including a financial management improvement plan or strategy (over time the department’s strategy evolved into the FIAR Plan, which ultimately became a subordinate plan to the department’s Strategic Management Plan) for addressing its financial management weaknesses and report to Congress and others semi-annually on its progress. Concentrate the department’s efforts and resources on improving the department’s financial management information. Systematically tie actions to improve processes and controls with business system modernization efforts described in the business enterprise architecture and enterprise transition plan required by 10 U.S.C. § 2222. Limit the resources the department spend each year to develop, compile, report, and audit unreliable financial statements. Submit an annual report to defense committees, the Office of Management and Budget (OMB), the Department of the Treasury (Treasury), GAO, and the DOD Inspector General (DOD IG) concluding on whether DOD policies, procedures, and systems support financial statement reliability, and the expected reliability of each DOD financial statement. Certify to the DOD IG whether a component or DOD financial statement for a specific fiscal year is reliable. Following DOD’s assertion that a financial statement is reliable, DOD may expend resources to develop, compile, report, and audit the statement and the statements of subsequent fiscal years. Because of the complexity and magnitude of the challenges facing the department in improving its business operations, GAO has long advocated the need for a senior management official to provide strong and sustained leadership. Recognizing that executive-level attention and a clear strategy were needed to put DOD on a sustainable path toward successfully transforming its business operations, including financial management, the National Defense Authorization Act (NDAA) for fiscal year 2008 designated the Deputy Secretary of Defense as the department’s Chief Management Officer (CMO), created a Deputy CMO position, and designated the undersecretaries of each military department as CMOs for their respective departments. The act also required the Secretary of Defense, acting through the CMO, to develop a strategic management plan that among other things would provide a detailed description of performance goals and measures for improving and evaluating the overall efficiency and effectiveness of the department’s business operations and actions underway to improve operations. To further draw the department’s attention to the need to improve its strategy for addressing financial management weaknesses and achieve audit readiness the NDAA for Fiscal Year 2010 made the FIAR Plan a statutory mandate, requiring the FIAR Plan to include, among other things specific actions to be taken and costs associated with (a) correcting the financial management deficiencies that impair DOD’s ability to prepare timely, reliable, and complete financial management information; and (b) ensuring that DOD’s financial statements are validated as ready for audit by no later than September 30, 2017, and actions taken to correct and link financial management deficiencies with process and control improvements and business system modernization efforts described in the business enterprise architecture and enterprise transition plan required by 10 U.S.C. § 2222. Consistent with the priorities announced by the DOD Comptroller in August 2009, the act also focused the department’s improvement efforts on first ensuring the reliability of the department’s budgetary information and property accountability records for mission-critical assets. In addition, the act directed DOD to report to congressional defense committees no later than May 15 and November 15 each year on the status of its FIAR Plan implementation. Furthermore, the act required that the first FIAR Plan issued following enactment of this legislation (1) include a mechanism to conduct audits of the military intelligence programs and agencies and submit the audited financial statements to Congress in a classified manner and (2) identify actions taken or to be taken by the department to address the issues identified in our May 2009 report on DOD’s efforts to achieve financial statement auditability. Over the years, the department has initiated several broad-based reform efforts, including the 1998 Biennial Strategic Plan for the Improvement of Financial Management within the Department of Defense and the 2003 Financial Improvement Initiative, intended to fundamentally transform its financial management operations and achieve clean financial statement audit opinions. In 2005, DOD’s Comptroller established the DOD FIAR Directorate to develop, manage, and implement a strategic approach for addressing the department’s financial management weaknesses and achieving auditability and to integrate those efforts with other improvement activities, such as the department’s business system modernization efforts. The first FIAR Plan was issued in December 2005. DOD’s FIAR Plan defines DOD’s strategy and methodology for improving financial management and controls, and summarizes and reports the results of the department’s improvement activities and progress toward achieving financial statement auditability. Further, the FIAR Plan has focused on achieving three goals: (1) implement sustained improvements in business processes and controls to address internal control weaknesses, (2) develop and implement financial management systems that support effective financial management, and (3) achieve and sustain financial statement audit readiness. To date, the department’s improvement efforts have not resulted in the fundamental transformation of DOD’s financial management operations necessary to resolve the department’s long-standing financial management weaknesses; however, some progress has been made and the department’s strategy has continued to evolve. While none of the military services have obtained unqualified (clean) audit opinions on their financial statements, some DOD organizations, such as the Army Corps of Engineers, Defense Finance Accounting Service, the Defense Contract Audit Agency, and the DOD IG, have achieved this goal. Moreover, some DOD components that have not yet received clean audit opinions, such as the Defense Information Service Agency (DISA), are beginning to reap the benefits of strengthened controls and processes gained through ongoing efforts to improve their financial management operations and reporting capabilities. For example, according to DISA’s Comptroller, the agency was able to resolve over $270 million in Treasury mismatches through reconciliations of over $12 billion in disbursement and collection activities. In addition, DISA’s efforts to improve processes and controls over its accounts receivable and payable accounts have resulted in improvements in its ability to (1) substantiate the validity of DISA’s customer billings and collect funds due to DISA, and (2) identify areas where funds could be deobligated and put to better use. Moreover, DISA management has gained increased assurance over its reported cash availability balance, thereby improving mission-critical decision making. Since its inception, the FIAR Plan has followed an incremental approach to structure its process for examining operations, diagnosing problems, planning corrective actions, and preparing for audit. Moreover, the FIAR Plan has continued to evolve and mature as a strategic plan. Initially, DOD components independently established their own financial management improvement priorities and methodologies and were responsible for implementing the corrective actions they determined were needed to address weaknesses and achieve financial statement auditability. However, as we reported in May 2009, it was difficult to link corrective actions or accomplishments reported by the FIAR Plan to FIAR goals and measure progress. In addition, we reported that as the department’s strategic plan and management tool for guiding and reporting on incremental progress toward achieving these goals, the FIAR Plan could be improved in several areas. Specifically, we found the following: Clear guidance was needed in developing and implementing improvement efforts. A baseline of the department’s and/or key component’s current financial management weaknesses and capabilities was needed to effectively measure and report on incremental progress. Linkage between FIAR Plan goals and corrective actions and reported accomplishments was needed. Clear results-oriented metrics for measuring and reporting incremental progress were needed. Accountability should be clearly defined and resources budgeted and consumed should be identified.