DOD continues to confront pervasive, decades-old financial management problems related to its systems, processes (including internal controls), and people (human capital). These problems have (1) resulted in a lack of reliable information needed to make sound decisions and report the status of DOD’s activities through financial and other reports, (2) hindered its operational efficiency, (3) impacted mission performance, and (4) left the department vulnerable to fraud, waste, and abuse. DOD’s serious financial management and related business systems problems led us in 1995 to put both DOD financial management and systems modernization on our list of high-risk areas in the federal government, a designation that continues today. As discussed in the results of our audit of the fiscal year 2002 Financial Statements of the U.S. Government, DOD’s financial management deficiencies, taken together, continue to represent one of the largest obstacles 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 pervasive weaknesses in financial management systems, processes, and controls. These weaknesses not only hamper the department’s ability to produce timely and accurate financial management information but also impact mission performance and make mission costs unnecessarily high. Ineffective asset accountability and the lack of effective controls continue to adversely affect visibility over its estimated $1 trillion investment in inventories and property, plant, and equipment (including weapon systems and other property). Such information is key to meeting military objectives and readiness goals. Further, unreliable cost and budget information related to a reported $700 billion of liabilities, particularly $59 billion of reported environmental liabilities, and about $380 billion of reported costs negatively affects DOD’s ability to effectively project funding needs, maintain adequate funds control, reduce costs, and measure performance. DOD has invested, and continues to invest, significant resources—in terms of dollars, time, and people—in its systems without demonstrated improvement in its business operations and adequate management and oversight, thereby continuing to perpetuate a proliferation of systems that do not adequately address the department’s needs. Finally, DOD’s weak overall control environment has left the department vulnerable to fraud, waste, and abuse. As the results of the department’s fiscal year 2002 financial audit and other audit work demonstrate, DOD continues to confront serious weaknesses in these areas. Of the $776 billion of inventory and related property and general property, plant, and equipment (PP&E) assets reported by federal entities for fiscal year 2002, DOD is responsible for about half—approximately $146 billion in inventory and related property and $226 billion of general PP&E, comprised of $162 billion in real property (land, buildings, facilities, capital leases, and improvements to those assets); $37 billion in personal property (such as vehicles, equipment, telecommunications systems, computers, and software); and $27 billion in construction-in-progress, the largest amount of which belongs to the Corps of Engineers. While DOD is not presently required to report dollar values for its weapons systems and support PP&E used in the performance of military missions, such reporting will be required beginning October 1, 2002. The amount subject to reporting will likely be significant considering that DOD has estimated an acquisition cost of over $64 billion for only three of its major weapons systems acquisition programs. Effective and efficient asset management and accountability is crucial to DOD’s defense of our national interests. While the department has undertaken several initiatives over the years to improve its asset management and accountability systems, processes, and controls, material weaknesses persist. As a result, DOD lacks reliable information about the quantity, location, condition, and value of inventory and property— including military equipment—critical to the department’s ability to effectively meet military objectives and readiness goals. Ineffective and inefficient asset management and accountability leave the department vulnerable to fraud, waste, and abuse. Over the past 2 years, the DOD Inspector General (IG) and we have issued numerous reports detailing problems with asset management and accountability, including the following examples. DOD and its military services and units did not know how many Joint Service Lightweight Integrated Suit Technology (JSLIST)—commonly referred to as “chem-bio suits”— they had, their condition, and where they were located. This lack of visibility was due to several factors, including the use of nonstandard, nonintegrated, stovepiped systems. Nonintegrated systems are unable to share data across business applications and therefore, multiple manual data entries must be made into numerous stand-alone systems, which result in errors, add significantly to administrative costs, and generally exacerbate asset visibility problems. The methods used to control and maintain visibility over JSLIST ranged from stand-alone automated systems, to spreadsheet applications, to pen and paper, to nothing at all. For JSLIST, the result was that DOD was excessing and selling these suits on the Internet for pennies on the dollar, while at the same time procuring hundreds of thousands of new garments annually. Similarly, a few years ago, the Defense Logistics Agency (DLA) had problems identifying and removing from its inventory defective Battle Dress Overgarments (BDO)—the JSLIST predecessor. As a result, some of the defective suits were shipped to U.S. forces in high-threat areas. In a June 2000 testimony, the DOD IG pointed out that a physical count of BDOs could not locate 420,000 protective suits that were recorded in DLA’s accountability database. DOD lacked effective processes and controls to ensure that easily pilferable and sensitive items were properly recorded and safeguarded. For example, we found that the military services failed to record all of the pilferable and sensitive items acquired through purchase card transactions, including the Navy’s failure to record a $757,000 purchase comprised of 430 computers, 213 flat panel monitors, and other computer hardware and software. The Navy was unable to provide us with evidence confirming the location of 187 of those computers and 87 of the flat panel monitors. Similarly, in our recent review of property controls at three military treatment facilities, we found that items such as a laptop computer, a Sony monitor, and a sterilizer were not recorded in the property records. We also found that numerous recorded items could not be located. Most of these were lower priced (under $5,000) or pilferable items such as a personal digital assistant, a cellular telephone, computer monitors, color printers, a handheld radio, and various pieces of medical equipment such as a stretcher, electric beds, and intravenous pumps. Under federal, state, and international law, DOD faces a major funding requirement associated with environmental cleanup and disposal resulting from prior and current operations and from the production of weapons systems. In its fiscal year 2002 financial statements, DOD reported an estimated liability of $59 billion to manage and clean up or contain a diverse population of environmental contamination comprised of $22 billion for closed and open sites where past and current waste disposal practices, leaks, spills, and other activities have created a risk to public health or the environment; $14 billion for closed, transferring, and active military ranges where contamination and unexploded ordnance create environmental hazards; and $23 billion for cleanup, demilitarization, and disposal of nuclear and non-nuclear weapons systems, chemical weapons, and munitions. DOD’s reported cost represents the current value of estimated future cash outlays that will need to be paid from appropriations; therefore, the Congress needs reliable information in order to plan how much and when to provide funding for cleanup activities. In past years, we and the DOD IG have repeatedly reported that the environmental liability amounts presented in DOD’s financial statements were not reliable because the department did not have (1) sufficient guidance for identifying and categorizing cleanup activities whose costs must be included in the liability calculation, (2) complete inventories of the sites and weapons systems that will require cleanup or containment, and (3) valid cost estimating models that produce consistent and supportable liability estimates. These deficiencies were not systems related but rather resulted from inadequate policies and processes and a lack of leadership. We have also issued individual reports on several environmental cleanup categories, including training ranges and on-going operations. In those reports, we specifically cite weaknesses related to DOD’s lack of complete site inventories, which means that the department’s reported liability amount is likely understated. In line with our findings, the Air Force has recently confirmed that it is investigating possible radioactive waste buried at more than 80 former and current air bases around the country. According to the Air Force, it lost track of the waste burial sites because of poor record keeping and is now trying to identify and inspect the lands for safety concerns. Costs for cleaning up these sites are not currently included in the Air Force’s reported liability amounts. In addition, incomplete identification of cleanup sites on installations that are currently being used by the military could have negative consequences for future base reutilization, alignment, and closure decisions. DOD’s appropriation for fiscal year 2002 represented 18 percent of the total U.S. budget and 48 percent of discretionary funds. For fiscal year 2002, DOD reported disbursing $347 billion to, among other things, make payments to 5.7 million military and civilian personnel and annuitants, process and pay 11.2 million contractor invoices, and make 7.3 million travel payments. The magnitude of the dollars and number of transactions involved makes it imperative that DOD maintain accurate fund balances and properly account for costs; however, DOD financial management systems and processes continue to be significant impediments to reporting complete and accurate information with respect to budgetary and disbursement activities.