In performing our evaluation of the accuracy and completeness of DOD’s reported inventory of financial management systems, we reviewed DOD guidance related to classifying its systems as financial, mixed financial, and nonfinancial; determined whether systems categorized as nonfinancial contained information needed to produce DOD financial statements and other financial reports; compared DOD’s financial management systems inventory to other DOD systems inventories to determine whether categories of systems not included in financial management systems inventories and reports were properly categorized as nonfinancial (however, we did not test the accuracy of these inventories); interviewed appropriate DOD, OMB, and DFAS staff to obtain information regarding the categorizing and reporting of financial management systems; reviewed federal financial management system guidance and applicable laws, the Joint Financial Management Improvement Program’s (JFMIP) Framework for Federal Financial Management Systems, and OMB Circulars A-123, A-127, and A-130; and reviewed military service audits to identify systems used to prepare financial statements. We performed our work from December 1995 to November 1996 in the Washington, D.C., area in accordance with generally accepted government auditing standards. We requested agency comments from the Secretary of Defense or his designee. The Deputy Chief Financial Officer provided us with written comments that are discussed in the “Agency Comments and Our Evaluation” section of this report and reprinted in appendix II. Legislative and other requirements to which DOD is subject recognize the significance of developing a complete financial management systems inventory. The intent of these requirements, as indicated in the policy statement found in section 6 of OMB Circular A-127, is to ensure that financial management systems provide complete, reliable, and timely information to enable government entities to carry out their fiduciary responsibilities; deter fraud, waste, and abuse; and facilitate efficient and effective delivery of programs through relating financial consequences to program performance. Further details on federal financial management systems requirements can be found in appendix I. The Chief Financial Officers (CFO) Act of 1990 gives agency CFOs the responsibility for developing and maintaining integrated accounting and financial management systems. In addition, the act requires that the agency CFO provide policy guidance and oversight of agency financial management personnel, activities, and operations, including the implementation of agency asset management systems such as those for property and inventory management. OMB implementing guidance states that the CFO is to approve the design for information systems that provide, at least in part, financial and/or program performance data used in financial statements, solely to ensure that CFO needs are met. In addition, CFOs are required to prepare and annually revise agency plans to implement OMB’s 5-year financial management plan for the federal government. Agency 5-year plans are to include information such as the agency’s strategy for developing and integrating agency accounting, financial information, and other financial management systems. A recent congressional initiative in this area is the Federal Financial Management Improvement Act of 1996, which provides a legislative mandate to implement and maintain financial management systems that substantially comply with federal financial management systems requirements, applicable federal accounting standards, and the U.S. Standard General Ledger. The legislative history of the act expressly refers to JFMIP requirements and OMB Circular A-127 as sources of the financial management systems requirements. If the head of an agency determines that the agency’s financial management systems do not comply with the requirements of the act, a remediation plan must be established that includes resources, remedies, and intermediate target dates necessary to bring the agency’s financial management systems into substantial compliance. The act defines financial management systems to include the financial systems and the financial portions of mixed systems necessary to support financial management, including automated and manual processes, procedures, controls, data, hardware, software, and support personnel dedicated to the operation and maintenance of system functions. A mixed system is defined as an information system that supports both financial and nonfinancial functions of the federal government or its components. Additional key financial management systems requirements include the following. JFMIP’s Framework for Federal Financial Management Systems provides a model for the development of an integrated financial management system. Circular A-127 requires that executive agencies develop and maintain an agencywide inventory of financial management systems and ensure that appropriate assessments of these systems are conducted. Circular A-127 applies to financial management systems, which include financial and mixed systems. The circular also requires that agencies establish and maintain a single, integrated financial management system. According to the circular, a single, integrated financial management system refers to a unified set of financial systems and the financial portions of mixed systems encompassing the software, hardware, personnel, processes (manual and automated), procedures, controls, and data necessary to carry out financial management functions, manage financial operations of the agency, and report on the agency’s financial status to central agencies, the Congress, and the public. The Paperwork Reduction Act establishes a broad mandate for agencies to perform their information resources management activities in an efficient, effective, and economical manner. Consistent with the act, Circular A-130 states that the head of each agency shall maintain an inventory of the agency’s major information systems. OMB requires that executive agencies, under section 4 of the Federal Managers’ Financial Integrity Act (FMFIA), produce an annual statement on whether their financial management systems conform with governmentwide principles, standards, and requirements. DFAS maintains a DOD inventory of financial systems in the Systems Inventory Data Base (SID). Using SID, DOD reported 249 systems in its fiscal year 1995 annual financial management systems inventory to OMB. However, this does not include many systems that DOD relies on to produce financial management information and reports. A complete inventory is a critical step in DOD’s efforts to correct its long-standing financial systems deficiencies and develop a reliable, integrated financial management system. These deficiencies have been a major factor contributing to DOD’s inability to fulfill its stewardship responsibilities for its resources, including maintaining control over specific assets, such as shipboard supplies and weapons systems, and over its expenditures, such as payroll and contract payments. In addition, the DOD Inspector General (IG) recently reported that (1) the overarching deficiency that prevented auditors from rendering audit opinions on fiscal year 1995 DOD general fund financial statements was the lack of adequate accounting systems and (2) disclaimers of opinion can most likely be expected until the next century. The number of reported systems has been limited because both DOD regulations and DFAS guidance did not properly define financial management systems, as required. Although we did not identify all of the systems that should have been included, several of the excluded systems account for billions of dollars of DOD assets and are clearly mixed systems that meet the OMB and JFMIP definition of financial management systems. DOD Financial Management Regulation (DOD 7000.14-R, Volume 1) does not include all mixed systems in its definition of financial management systems, as required. Instead, the regulation states that “feeder systems ... are the initial record of financial data for processing by accounting systems” are not within the scope of financial management systems reporting. The regulation provides the following specific examples of feeder systems: (1) logistics and inventory systems that provide acquisition cost, location, and quantity information, (2) personnel systems that provide grade and entitlements information, and (3) timekeeping systems that provide attendance and leave information. DFAS repeats DOD’s limited definition of financial management systems in its annual guidance to Defense components for conducting financial management systems reviews. The feeder systems generally excluded by DOD are typical of systems used to track financial events and are specifically mentioned in the JFMIP Framework document as critical to an integrated financial management system. An integrated system under general ledger control is necessary to provide oversight and control to ensure accurate and complete accounting for DOD’s resources. To be truly effective, DOD’s integrated financial management system must link program delivery to the systems that process and track financial events. This linkage is crucial to support the information needs of management, central agencies, and the Congress. Integrated systems help to provide the overall discipline needed to ensure the accuracy and completeness of the information that is used to support DOD’s stewardship responsibilities for the vast resources entrusted to it. Audit reports have disclosed numerous problems resulting from the lack of an integrated financial management system that directly affect the military services’ ability to achieve mission objectives. For example, in our review of the Department of the Navy’s inventory management, we reported that Navy’s item managers could not keep track of the $5.7 billion in operating materials and supplies on board ships and at 17 redistribution sites. The Atlantic and Pacific Fleets and other Navy components are pursuing separate, nonintegrated systems projects in an attempt to improve visibility and thus management of their operating materials and supplies. In another example, at the end of fiscal year 1995, DOD reported that it had inventory valued at almost $70 billion, and we estimate that about half of the inventory includes items that are not needed to support DOD war reserves or current operating requirements. Since 1990, GAO has designated DOD inventory management a high-risk area, with billions of dollars being wasted on excess supplies. The lack of integrated financial management systems and the lack of accurate reliable data to support the quantity, condition, and value of items have been major contributing factors to DOD’s inability to account for and control its inventory. In addition, we previously reported that thousands of soldiers on Army’s payroll could not be matched with Army personnel records, and Army had no assurance that these individuals should have been paid. In fact, we found that DFAS paid $6.1 million to 2,279 soldiers who should not have been paid. In response to our recommendation that steps be taken to integrate its payroll and personnel systems, DOD stated that neither the DOD CFO nor the DFAS Director alone had sufficient authority to ensure that specific steps were taken toward the integration or interface of payroll and personnel systems.