The Navy operates thousands of shore activities worldwide and employs over 1 million military and civilian personnel. Hundreds of Navy Fund Administering Activities at the field level provide budgeting and accounting for more than 9,000 Navy cost centers. A cost center is the lowest level in the Navy’s financial management chain of command and may be a ship, an aircraft squadron, a staff office, or a department or division of a shore activity where identification of costs is required. DFAS, which organizationally reports to the Under Secretary of Defense (Comptroller), was created in January 1991 to streamline and standardize DOD’s finance and accounting procedures, systems, and operations while reducing the costs of such services. Ownership of many DOD financial management systems, including some Navy systems, was transferred to DFAS. At the same time, many mixed financial management systems, such as logistics systems which provide inventory and property financial data, remained under the control of the services or other DOD components. Policy guidance and direction related to accounting system development and operations is performed by the DOD Comptroller’s Office. In the past, Navy activities reported financial information to Defense Accounting Offices maintained by DFAS which, in turn, generated monthly reports to DFAS Cleveland Center. Beginning in fiscal year 1995, DFAS began consolidating its Navy Defense Accounting Offices into six sites called operating locations. Information from these operating locations will continue to be reported to DFAS Cleveland Center. Navy financial management systems have many long-standing problems that prior system development efforts have not fixed. For example, according to the Naval Audit Service, during the 1980s, Navy spent over $260 million on two failed attempts to consolidate and standardize its accounting systems. Both the Standard Automated Financial System and the Integrated Disbursing and Accounting Financial Management System were terminated in 1989 due to design problems, excessive cost escalations, and slippages in completion time. Navy’s financial management system problems continue even though many of Navy’s systems have been transferred to DFAS. For example, DOD’s fiscal year 1995 Federal Managers’ Financial Integrity Act (FMFIA) report stated that a majority of DOD’s financial systems did not comply with Office of Management and Budget (OMB) Circular A-127 and that many perform similar functions, resulting in inefficiencies and disparate business practices. Navy’s Statement of Assurance, used to prepare the DOD Federal Managers’ Financial Integrity Act report, also stated that its systems did not comply with Circular A-127’s integration, accounting classification codes, and general ledger requirements. In August 1991, DFAS began to review DOD’s accounting systems and to develop a plan to (1) decrease the number of financial systems and (2) correct systems deficiencies. In December 1993, DFAS developed an Interim Migratory Strategy, consisting of the following two phases. First, DFAS planned to reduce DOD’s 91 general fund systems to 11 interim migratory systems. The interim migratory systems were to be selected from the military services’ existing financial systems that were considered to be the least deficient. In addition, DFAS planned to identify and correct the interim migratory systems deficiencies. In particular, DFAS plans called for enhancing the systems to comply with DOD’s standard general ledger, key accounting requirements, and standard budget and accounting classification code by October 1, 1997. Second, DFAS planned to eventually select the best interim migratory system(s) to implement DOD-wide as its target system(s). DFAS has not established time frames for this effort. In June 1994, DFAS Cleveland Center selected STARS Field Level to serve as Navy’s interim migratory system for field-level general fund accounting. The Assistant Secretary of the Navy for Financial Management concurred with STARS’ selection. DFAS Cleveland and Navy personnel deemed STARS the newest, least deficient, and most advanced of Navy’s 25 existing general fund accounting systems. Through April 30, 1996, the largest of the former field-level systems had been converted to STARS Field Level at 923 activities, and 122 activities remained to be converted to STARS Field Level. In addition to STARS Field Level, the STARS umbrella includes other components—an on-line bill paying component and components that provide financial data to Navy’s major claimants. DFAS Cleveland Center is also in the process of developing a STARS financial reporting module at the departmental level. The STARS enhancement effort is intended to ensure that all STARS components comply with DOD’s key accounting requirements and standard general ledger as well as to implement other improvements. In April 1996, DFAS created the Defense Accounting System Program Management Office to centrally manage the consolidation and modernization of DFAS accounting systems. After the period of our review, DFAS selected STARS as one of three DFAS target general fund accounting systems, under the oversight of this Program Management Office. To assess Navy’s efforts to reduce the number of accounting systems and implement and enhance STARS, we examined DOD, DFAS, and Navy documents and conducted interviews with appropriate officials. We also reviewed STARS system documentation and compared it to the financial management system architecture guidance in the Joint Financial Management Improvement Program’s Framework for Federal Financial Management Systems. We also interviewed the Director of the STARS Project Office on this issue. To evaluate DFAS Cleveland Center’s plans to enhance STARS, we examined STARS project planning documentation, such as its April 18, 1996, Plan of Action and Milestones and software project plans. We also reviewed analyses related to implementing various key accounting requirements in STARS prepared by an outside contractor. We interviewed officials from this contractor, the STARS Project Office, DFAS Cleveland Center, and Navy’s Fleet Material Support Office (FMSO)—which serves as the primary STARS Central Design Agency. To review the implementation of STARS at the field level, we judgmentally selected 18 Navy shore activities that converted to STARS Field Level between July 1993 and March 1995, from a universe of east and west coast activities. We visited each of these sites, examined documents related to various aspects of Navy’s financial management operations, and identified areas applicable to or interfacing with field-level accounting and reporting. We obtained sample financial reports with explanations of their purpose and use, conducted interviews with field-level financial managers, and reviewed supporting accounting and reporting documentation. During this review, we noted any problems concerning accuracy, timeliness, and usefulness and examined their cause and resultant effect on field-level financial operations. We performed our work at the Office of the DOD Comptroller, DFAS Headquarters, DFAS Cleveland Center’s STARS Project Office, Navy’s FMSO (Mechanicsburg, PA), and the 18 Navy shore activities listed in appendix I. The Department of Defense provided written comments on a draft of this report. These comments are presented and evaluated in the “Agency Comments and Our Evaluation” section of this report and are reprinted in appendix II. Our work was performed from April 1995 through early August 1996 in accordance with generally accepted government auditing standards. We believe that savings will accrue as a result of eliminating the duplication and inefficiencies of supporting and maintaining Navy’s 25 existing accounting systems, although we did not attempt to quantify such savings. In October 1994, a contractor to the STARS Project Office completed an economic analysis that compared the costs of developing and implementing STARS to continuing with the existing systems. This economic analysis estimated that converting five of Navy’s existing general fund accounting systems to STARS (primarily at the field level) would save $162 million in the first 5 years. This initial estimated savings, primarily in maintenance and operating costs, was reduced by the estimated STARS Field Level system development, maintenance, operating, and training costs of $145 million, for a net savings of $17 million. Over 15 years, net savings were projected to total $293 million. We did not assess the reliability of these estimates. However, we note that achieving the projected level of net savings could be diminished by the need to provide additional training and technical support to field activities in using STARS Field Level. These issues are discussed later in this report. In addition, the October 1994 economic analysis was not a total life-cycle economic analysis of all STARS components. For example, it did not include costs to enhance all of the STARS components to bring them into compliance with DOD’s standard general ledger, key accounting requirements, and the standard budget and accounting classification code. The Major Automated Information Systems Review Council, which is reviewing the STARS project, directed the STARS Project Office to conduct a total life-cycle economic analysis of all STARS components. This analysis is expected to be completed by December 31, 1996. In addition, as discussed in the next section, DFAS has not developed a complete system architecture for STARS—basically a blueprint for what the system will do and how it will operate. As a result, any estimate of STARS total costs will be incomplete. We also found that, in less than 2 years, actual obligations to enhance STARS in certain areas were significantly higher than budgeted. The STARS Project Office estimated that in fiscal years 1995 and 1996, STARS software development costs would total $35.6 million. Of this amount, $18.8 million was budgeted for projects pertaining to the key accounting requirements, the budget and accounting classification code, and the consolidation efforts. As of July 23, 1996, actual obligations for the software projects related to these three areas were $24.5 million, or 30 percent, above the budget estimate, although total STARS software development obligations were close to what was estimated. In addition, some software development projects have already exceeded their total budget.