Because DOD is one of the largest and most complex organizations in the world, overhauling its business operations represents a huge management challenge. In fiscal year 2004, DOD reported that its operations involved $1.2 trillion in assets, $1.7 trillion in liabilities, over 3.3 million in military and civilian personnel, and over $605 billion in net cost of operations. For fiscal year 2005, the department received an annual appropriation of about $417 billion and was appropriated about $76 billion for the global war on terrorism. Execution of DOD’s operations spans a wide range of defense organizations, including the military services and their respective major commands and functional activities, numerous large defense agencies and field activities, and various combatant and joint operational commands that are responsible for military operations for specific geographic regions or theaters of operation. To support DOD’s operations, the department performs an assortment of interrelated and interdependent business processes, including logistics, procurement, health care, and financial management. Transformation of DOD’s business systems and operations is critical to the department providing Congress and DOD management with accurate and timely information for use in the decision-making process. This effort is an essential part of the Secretary of Defense’s broad initiative to “transform the way the department works and what it works on.” The Secretary of Defense has estimated that improving business operations of the department could save 5 percent of DOD’s annual budget, which based on fiscal year 2005 appropriations, represents a savings of about $25 billion. For several years, we have reported that DOD faces a range of financial management and related business process challenges that are complex, long-standing, pervasive, and deeply rooted in virtually all business operations throughout the department. As the Comptroller General testified in April 2005, DOD’s financial management deficiencies, taken together, continue to represent a major impediment to achieving an unqualified opinion on the U.S. government’s consolidated financial statements. To date, none of the military services has passed the test of an independent financial audit because of pervasive weaknesses in internal controls and processes and fundamentally flawed business systems. In identifying improved financial performance as one of its five governmentwide initiatives, the President’s Management Agenda recognized that without sound internal controls 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. Long-standing weaknesses in DOD’s financial management and related business processes and systems 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, as the following examples illustrate. The current inefficient, paper-intensive, error-prone travel reimbursement process has resulted in inaccurate, delayed, and denied travel payments for mobilized Army Guard soldiers. We found a broad range of reimbursement problems that included disputed amounts for meals that we estimated to be as high as about $6,000 for each of 76 soldiers in one case study that remained unpaid by the end of our review. Until DOD improves the antiquated process that requires Army Guard soldiers to accumulate, retain, and submit numerous paper documents, reimbursement problems and inefficiencies will likely continue. Of approximately 930,000 travel vouchers received between fiscal years 2002 and 2004, the Defense Finance and Accounting Service (DFAS) Contingency Travel Operations Office rejected and returned about 139,000 vouchers to soldiers for additional paper documentation or to correct other processing deficiencies. This repeated churning of vouchers frustrated soldiers and added to the volume of claims to be processed. Injured and ill reserve component soldiers—who are entitled to extend their active duty service to receive medical treatment—have been inappropriately removed from active duty status in the automated systems that control pay and access to medical care. The current stovepiped, nonintegrated systems are labor-intensive and require extensive error-prone manual entry and reentry. Inadequate controls resulted in some soldiers experiencing significant gaps in their pay and medical benefits, causing hardships for the soldiers and their families. In addition, because these soldiers no longer had valid active duty orders, they did not have access to the commissary and post exchange—which allows soldiers and their families to purchase groceries and other goods at a discount. In one case we reviewed, during a 12-month period, while attempting to obtain care for injuries sustained from a helicopter crash in Afghanistan, one Special Forces soldier fell out of active duty status four times. During the times he was not recorded in the system as being on active duty, he was not paid and he and his family experienced delays in receiving medical treatment. In all, he missed payments for 10 pay periods—totaling $11,924. Ninety-four percent of mobilized Army National Guard and Reserve soldiers we investigated during two audits had pay problems. These problems distracted soldiers from their missions, imposed financial hardships on their families, and may have a negative impact on retention. The processes and automated systems relied on to provide active duty payments to mobilized Army Guard and Reserve soldiers are so error-prone, cumbersome, and complex that neither DOD nor, more importantly, the soldiers themselves could be reasonably assured of timely and accurate payments. Some of the pay problems soldiers experienced often lingered unresolved for considerable lengths of time, some for over a year. DOD continues to lack visibility and control over the supplies and spare parts it owns. Therefore, it cannot monitor the responsiveness and effectiveness of the supply system to identify and eliminate choke points. Currently, DOD does not have the ability to provide timely or accurate information on the location, movement, status, or identity of its supplies. Although total asset visibility has been a departmentwide goal for over 30 years, DOD estimates that it will not achieve this visibility until the year 2010. DOD may not meet this goal by 2010, however, unless it overcomes three significant impediments: (1) developing a comprehensive plan for achieving visibility, (2) building the necessary integration among its many inventory management information systems, and (3) correcting long-standing data accuracy and reliability problems within existing inventory management systems. A key to successful implementation of a comprehensive logistics strategy will be addressing these initiatives as part of a comprehensive, integrated business transformation. The Defense Logistics Agency (DLA) and each of the military services experienced significant shortages of critical spare parts, even though more than half of DOD’s reported inventory—about $35 billion— exceeded current operating requirements. In many cases, these shortages contributed directly to equipment downtime, maintenance problems, and the services’ failure to meet their supply availability goals. DOD, DLA, and the military services each lack strategic approaches and detailed plans that could help mitigate these critical spare parts shortages and guide their many initiatives aimed at improving inventory management. The Navy did not know how much it spent on telecommunications and did not have detailed cost and inventory data needed to evaluate spending patterns and to leverage its buying power. At the four case study sites we audited, management oversight of telecommunication purchases did not provide reasonable assurance that requirements were met in the most cost-effective manner. For example, cell phone usage at three sites was not monitored to determine whether plan minutes met users’ needs, resulting in overpayment for cell phone services. In addition, the Navy lacks specific policies and processes addressing the administration and management of calling cards. On one card alone, in a 3-month period, the Navy paid over $17,000. Not until the vendor’s fraud unit raised questions about more than $11,000 in charges in a 6-day period was the card suspended. Over the years, DOD recorded billions of dollars of disbursements and collections in suspense accounts because the proper appropriation accounts could not be identified and charged. Because documentation needed to resolve these payment recording problems could not be found after so many years, DOD requested and received authority to write-off certain aged suspense transactions. While DOD reported that it wrote off an absolute value of $35 billion or a net value of $629 million using the legislative authority, neither of these amounts accurately represents the true value of all the individual transactions that DOD had not correctly recorded in its financial records. Many of DOD’s accounting systems and processes routinely offset individual disbursements, collections, adjustments, and correction entries against each other and, over time, amounts might even have been netted more than once. This netting and summarizing misstated the total value of the write-offs and made it impossible for DOD to identify what appropriations may have been under- or overcharged or to determine whether individual transactions were valid. At December 31, 2004, DOD reports showed that, even after the write-offs, more than $1.3 billion (absolute value) remained in suspense accounts for longer than 60 days; however, DOD has acknowledged that its suspense reports are incomplete and inaccurate. In addition, DOD is still not performing effective reconciliations of its disbursement and collection activity. Similar to checkbook reconciliations, DOD needs to compare its records of monthly activity to Treasury’s records and promptly research and correct any differences. In September 2004, we reported that DOD had begun implementing a financial improvement initiative that included the goal of obtaining an unqualified audit opinion on its fiscal year 2007 consolidated financial statements but that the initiative lacked a clearly defined, integrated, well- documented, and realistic plan for improving DOD’s financial management and thus achieving that goal.