The Navy, with reported assets totaling $321 billion in fiscal year 2004, would be ranked among the largest corporations in the world if it were a private sector entity. According to the Navy, based upon the reported value of its assets, it would be ranked among the 15 largest corporations on the Fortune 500 list. Additionally, in fiscal year 2004 the Navy reported that its inventory was valued at almost $73 billion and that it held property, plant, and equipment with a reported value of almost $156 billion. Furthermore, the Navy reported for fiscal year 2004 that its operations involved total liabilities of $38 billion, that its operations had a net cost of $130 billion, and that it employed approximately 870,000 military and civilian personnel—including reserve components. The primary mission of the Navy is to control and maintain freedom of the seas, performing an assortment of interrelated and interdependent business functions to support its military mission with service members and civilian personnel in geographically dispersed locations throughout the world. To support its military mission and perform its business functions, the Navy requested for fiscal year 2005 almost $3.5 billion for the operation, maintenance, and modernization of its business systems and related infrastructure—the most of all the DOD components—or about 27 percent of the total $13 billion DOD fiscal year 2005 business systems budget request. Of the 4,150 reported DOD business systems, the Navy holds the largest inventory of business systems—with 2,353 reported systems or 57 percent of DOD’s reported inventory of business systems. The Secretary of Defense recognized that the department’s business operations and systems have not effectively worked together to provide reliable information to make the most effective business decisions. He challenged each military service to transform its business operations to support DOD’s warfighting capabilities and initiated the Business Management Modernization Program (BMMP) in July 2001. Further, the Assistant Secretary of the Navy for Financial Management and Comptroller (Navy Comptroller) testified that transforming the Navy’s business processes, while concurrently supporting the Global War on Terrorism, is a formidable but essential task. He stated that the goal of the transformation is to “establish a culture and sound business processes that produce high-quality financial information for decision making.” One of the primary elements of the Navy’s business transformation strategy is the Navy ERP. The need for business processes and systems transformation to provide management with timely information to make important business decisions is clear. However, none of the military services, including the Navy, have passed the scrutiny of an independent financial audit. Obtaining a clean (unqualified) financial audit opinion is a basic prescription for any well- managed organization, as recognized by the President’s Management Agenda. For fiscal year 2004, the DOD Inspector General issued a disclaimer on the Navy’s financial statements—Navy’s General Fund and Working Capital Fund—citing eight material weaknesses and six material weaknesses respectively, in internal control and noncompliance with the Federal Financial Management Integrity Act of 1996 (FFMIA). The inability to obtain a clean financial audit opinion is the result of weaknesses in the Navy’s financial management and related business processes and systems. Most importantly, the Navy’s pervasive weaknesses have (1) resulted in a lack of reliable information to make sound decisions and report on the status of activities, including accountability of assets, through financial and other reports to the Navy and DOD management and the Congress; (2) hindered its operational efficiency; (3) adversely affected mission performance; and (4) left the Navy and DOD vulnerable to fraud, waste, and abuse, as the following examples illustrate. The Navy’s lack of detailed cost information hinders its ability to monitor programs and analyze the cost of its activities. We reported 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, at the sites we 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. In one 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. 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. The Naval Inventory Control Point and its repair contractors have not followed DOD and Navy procedures intended to provide the accountability for and visibility of inventory shipped to Navy repair contractors. Specifically, Navy repair contractors are not routinely acknowledging receipt of government-furnished material received from the Navy. A DOD procedure requires repair contractors to acknowledge receipt of government-furnished material that has been shipped to them from the Navy’s supply system. However, Naval Inventory Control Point officials are not requiring repair contractors to acknowledge receipt of these materials. By not requiring repair contractors to acknowledge receipt of government-furnished material, the Naval Inventory Control Point has also departed from the procedure to follow up with the contractor within 45 days when the contractor fails to confirm receipt for an item. Without material receipt notification, the Naval Inventory Control Point cannot be assured that its repair contractors have received the shipped material. This failure to acknowledge receipt of material shipped to repair contractors can potentially impair the Navy’s ability to account for shipments leading to possible fraud, waste, or abuse. A limited Naval Audit Service audit revealed that 53 of 118 erroneous payment transactions, valued at more than $990,000, occurred because Navy certifying officials did not ensure accurate information was submitted to the Defense Finance and Accounting Service (DFAS) prior to authorizing payment. In addition, certifying officials submitted invoices to DFAS authorizing payment more than once for the same transaction. Brief Overview of Navy ERP To address the need for business operations reform, in fiscal year 1998 the Navy established an executive committee responsible for creating a “Revolution in Business Affairs” to begin looking at transforming business affairs and identifying areas of opportunity for change. This committee, in turn, set up a number of working groups, including one called the Commercial Business Practices (CBP) Working Group, which consisted of representatives from financial management organizations across the Navy. This working group recommended that the Navy should use ERP as a foundation for change and identified various ERP initiatives that were already being developed or under consideration within the Navy. Ultimately, the Navy approved the continuation of four of these initiatives, using funds from existing resources from each of the sponsors (i.e., commands) to test the feasibility of ERP solutions within the Navy. From 1998 to 2003, four different Navy commands began planning, developing, and implementing four separate ERP pilot programs to address specific business areas. A CBP Executive Steering Group was created in December 1998 to monitor the pilot activities. As the pilots progressed in their development and implementation, the Navy identified issues that had to be addressed at a higher level than the individual pilots, such as the integration between the pilots as well as with other DOD systems, and decided that one program would provide a more enterprisewide solution for the Navy. In August 2002, the Assistant Secretary of the Navy for Research, Development, and Acquisition established a Navy-wide ERP program to “converge” the four ongoing pilots into a single program. This Navy-wide program is expected to replace all four pilots by fiscal year 2008 and to be “fully operational” by fiscal year 2011. The Navy estimates that the ERP will manage about 80 percent of the Navy’s estimated appropriated funds—after excluding appropriated funds for the Marine Corps and military personnel and pay. Based on the Navy’s fiscal years 2006 to 2011 defense planning budget, the Navy ERP will manage approximately $74 billion annually. According to a Navy ERP official, while the Navy ERP would account for the total appropriated amount, once transactions occur at the depots, such as when a work order is prepared for the repair of an airplane part, the respective systems at the depots will execute and maintain the detailed transactions. This accounts for about 2 percent, or approximately $1.6 billion, being executed and maintained in detail by the respective systems at the aviation and shipyard depots—not by the Navy ERP. The remaining 20 percent that the ERP will not manage comprises funds for the Navy Installations Command, field support activity, and others. Each of the Navy’s four ERP pilot projects was managed and funded by different major commands within the Navy. The pilots, costing over $1 billion in total, were limited in scope and were not intended to provide corporate solutions to any of the Navy’s long-standing financial and business management problems. The lack of centralized management oversight and control over all four pilots allowed the pilots to be developed independently. This resulted in four more DOD stovepiped systems that could not operate with each other, even though each carried out many of the same functions and were based on the same ERP commercial-off-the- shelf (COTS) software. Moreover, due to the lack of high-level departmentwide oversight from the start, the pilots were not required to go through the same review process as other acquisition projects of similar magnitude. Four separate Navy organizations began their ERP pilot programs independently of each other, at different times, and with separate funding. All of the pilots implemented the same ERP COTS software, and each pilot was small in scale—relative to the entire Navy.