As I previously stated, and we have reported on for several years, DOD faces a range of challenges that are complex, long-standing, pervasive, and deeply rooted in virtually all major business operations throughout the department. As I testified last March and as discussed in our latest financial audit report, DOD’s financial management deficiencies, taken together, continue to represent the single largest obstacle to achieving an unqualified (clean) audit opinion on the U.S. government’s consolidated financial statements. While it is important to note that some DOD organizations, such as the Defense Finance Accounting Service (DFAS), the Defense Contract Audit Agency, and the Office of the Inspector General, have clean audit opinions for fiscal year 2004, significant DOD components do not. To date, none of the military services has passed the test of an independent financial audit because of pervasive weaknesses in internal control and processes and fundamentally flawed business systems. Moreover, the lack of adequate transparency and appropriate accountability across DOD’s major business areas results in billions of dollars of wasted resources annually at a time of growing fiscal constraints. In identifying improved financial performance as one of its five governmentwide initiatives, the President’s Management Agenda recognized that obtaining an unqualified financial audit opinion is a basic prescription for any well-managed organization. At the same time, it recognized that without sound internal control and accurate and timely financial and performance information, it is not possible to accomplish the President’s agenda and secure the best performance and highest measure of accountability for the American people. The Joint Financial Management Improvement Program (JFMIP) principals have defined certain measures, in addition to receiving an unqualified financial statement audit opinion, for achieving financial management success. These additional measures include (1) being able to routinely provide timely, accurate, and useful financial and performance information, (2) having no material internal control weaknesses or material noncompliance with laws and regulations, and (3) meeting the requirements of the Federal Financial Management Improvement Act of 1996 (FFMIA). Unfortunately, DOD does not meet any of these conditions. For example, for fiscal year 2004, the DOD Inspector General issued a disclaimer of opinion on DOD’s financial statements, citing 11 material weaknesses in internal control and noncompliance with FFMIA requirements. Recent audits and investigations by GAO and DOD auditors continue to confirm the existence of pervasive weaknesses in DOD’s financial management and related business processes and systems. These problems have (1) resulted in a lack of reliable information needed to make sound decisions and report on the status of DOD activities, including accountability of assets, through financial and other reports to Congress and DOD decision makers, (2) hindered its operational efficiency, (3) adversely affected mission performance, and (4) left the department vulnerable to fraud, waste, and abuse, of which I have a few examples. 782 of the 829 mobilized Army National Guard and Reserve soldiers from 14 case study units we reviewed had at least one pay problem— including overpayments, underpayments, and late payments— associated with their mobilization. DOD’s inability to provide timely and accurate payments to these soldiers, many of whom risked their lives in dangerous combat missions in Iraq or Afghanistan, distracted them from their missions, imposed financial hardships on the soldiers and their families, and has negatively impacted retention. (GAO-04-89, Nov. 13, 2003 and GAO-04-911, Aug. 20, 2004) DOD incurred substantial logistical support problems as a result of weak distribution and accountability processes and controls over supplies and equipment shipments in support of Operation Iraqi Freedom, similar to those encountered during the prior gulf war. These weaknesses resulted in (1) supply shortages, (2) backlogs of materials delivered in-theater but not delivered to the requesting activity, (3) a discrepancy of $1.2 billion between the amount of materiel shipped and that acknowledged by the activity as received, (4) cannibalization of vehicles, and (5) duplicate supply requisitions. (GAO-04-305R, Dec. 18, 2003) Inadequate asset accountability also resulted in DOD’s inability to locate and remove from its inventory over 250,000 defective chemical and biological protective garments known as Battle Dress Overgarments (BDOs)—the predecessor of the new Joint Service Lightweight Integrated Suit Technology (JSLIST). Subsequently, we found that DOD had sold many of these defective suits to the public, including 379 that we purchased in an undercover operation. In addition, DOD may have issued over 4,700 of the defective BDO suits to local law enforcement agencies. Although local law enforcement agencies are most likely to be the first responders to a terrorist attack, DOD failed to inform these agencies that using these BDO suits could result in death or serious injury. (GAO-04-15NI, Nov. 19, 2003) Ineffective controls over Navy foreign military sales using blanket purchase orders placed classified and controlled spare parts at risk of being shipped to foreign countries that may not be eligible to receive them. For example, we identified instances in which Navy country managers (1) overrode the system to release classified parts under blanket purchase orders without filing required documentation justifying the release and (2) substituted classified parts for parts ordered under blanket purchase orders, bypassing the control-edit function of the system designed to check a country’s eligibility to receive the parts. (GAO-04-507, June 25, 2004) DOD and congressional decision makers lack reliable data upon which to base sourcing decisions due to recurring weaknesses in DOD data- gathering, reporting, and financial systems. As in the past, we have identified significant errors and omissions in the data submitted to Congress on the amount of each military service’s depot maintenance work outsourced or performed in-house. As a result, both DOD and Congress lack assurances that the dollar amounts of public-private sector workloads reported by the military services are reliable. (GAO- 04-871, Sept. 29, 2004) Ineffective controls over DOD’s centrally billed travel accounts led to millions of dollars wasted on unused airline tickets, reimbursements to travelers for improper and potentially fraudulent airline ticket claims, and issuance of airline tickets based on invalid travel orders. For example, we identified 58,000 airline tickets—primarily purchased in fiscal years 2001 and 2002—with a residual value of more than $21 million that were unused and not refunded as of October 2003. On the basis of limited airline data, we determined that since 1997, the potential magnitude of DOD’s unused tickets could be at least $115 million. (GAO-04-825T, June 9, 2004 and GAO-04-398, Mar. 31, 2004) The Navy’s lack of detailed cost information hinders its ability to monitor programs and analyze the cost of its activities. For example, we found that the Navy lacked the detailed cost and inventory data needed to assess its needs, evaluate spending patterns, and leverage its telecommunications buying power. As a result, we found that at the sites reviewed, the Navy paid for telecommunications services it no longer required, paid too much for services it used, and paid for potentially fraudulent or abusive long-distance charges. For instance, we found that DOD paid over $5,000 in charges for one card that was used to place 189 calls in one 24-hour period from 12 different cities to 12 different countries. (GAO-04-671, June 14, 2004) DOD continues to use overly optimistic planning assumptions to estimate its annual budget request. These assumptions are reflected in its Future Years Defense Program (FYDP), which reports projected spending for the current budget year and at least 4 succeeding years. Such overly optimistic assumptions limit the visibility of costs projected throughout the FYDP period and beyond. As a result, DOD has too many programs for the available dollars, which often leads to program instability, costly program stretch-outs, and program termination. For example, in January 2003, we reported that the estimated costs of developing eight major weapons systems had increased from about $47 billion in fiscal year 1998 to about $72 billion by fiscal year 2003. In addition, in September 2004 the Congressional Budget Office projected that if the costs of weapons programs and certain other activities continued to grow as they have historically rather than as DOD currently projects, executing today’s defense plans would require spending an average of $498 billion a year through 2009. Without realistic projections, Congress and DOD will not have visibility over the full range of budget options available to achieve defense goals. (GAO-03- 98, Jan. 2003 and GAO-04-514, May 7, 2004) DOD did not know the size of its security clearance backlog at the end of September 2003 and had not estimated this backlog since January 2000. Using September 2003 data, we estimated that DOD had a backlog of roughly 360,000 investigative and adjudicative cases, but the actual backlog size is uncertain. DOD’s failure to eliminate and accurately assess the size of its backlog may have adverse affects. For example, delays in updating overdue clearances for personnel doing classified work may increase national security risks and slowness in issuing new clearances can increase the costs of doing classified government work. (GAO-04-344, Feb. 9, 2004) These examples clearly demonstrate not only the severity of DOD’s current problems, but also the importance of reforming the department’s business operations to more effectively support DOD’s core mission, to improve the economy and efficiency of its operations, and to provide for transparency and accountability to Congress and American taxpayers. The underlying causes of DOD’s financial management and related business process and system weaknesses are generally the same ones I have outlined in my prior testimonies before this Subcommittee over the last 3 years.