[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]
[H.A.S.C. No. 112-59]
DOD'S PLANS FOR FINANCIAL
MANAGEMENT IMPROVEMENT AND
ACHIEVING AUDIT READINESS
__________
HEARING
BEFORE THE
PANEL ON DEFENSE FINANCIAL MANAGEMENT
AND AUDITABILITY REFORM
OF THE
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD
JULY 28, 2011
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
U.S. GOVERNMENT PRINTING OFFICE
68-167 WASHINGTON : 2011
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PANEL ON DEFENSE FINANCIAL MANAGEMENT
AND AUDITABILITY REFORM
K. MICHAEL CONAWAY, Texas, Chairman
SCOTT RIGELL, Virginia ROBERT ANDREWS, New Jersey
STEVEN PALAZZO, Mississippi JOE COURTNEY, Connecticut
TODD YOUNG, Indiana TIM RYAN, Ohio
Paul Foderaro, Professional Staff Member
William Johnson, Professional Staff Member
Lauren Hauhn, Research Assistant
C O N T E N T S
----------
CHRONOLOGICAL LIST OF HEARINGS
2011
Page
Hearing:
Thursday, July 28, 2011, DOD's Plans for Financial Management
Improvement and Achieving Audit Readiness...................... 1
Appendix:
Thursday, July 28, 2011.......................................... 25
----------
THURSDAY, JULY 28, 2011
DOD'S PLANS FOR FINANCIAL MANAGEMENT IMPROVEMENT AND ACHIEVING AUDIT
READINESS
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Andrews, Hon. Robert, a Representative from New Jersey, Ranking
Member, Panel on Defense Financial Management and Auditability
Reform......................................................... 2
Conaway, Hon. K. Michael, a Representative from Texas, Chairman,
Panel on Defense Financial Management and Auditability Reform.. 1
WITNESSES
Hale, Hon. Robert F., Under Secretary of Defense (Comptroller),
U.S. Department of Defense..................................... 3
Khan, Asif A., Director, Financial Management and Assurance, U.S.
Government Accountability Office............................... 8
McGrath, Hon. Elizabeth A., Deputy Chief Management Officer, U.S.
Department of Defense.......................................... 6
APPENDIX
Prepared Statements:
Conaway, Hon. K. Michael..................................... 29
Hale, Hon. Robert F., joint with Hon. Elizabeth A. McGrath... 32
Khan, Asif A................................................. 43
Documents Submitted for the Record:
Organizational Plan of the Panel on Defense Financial
Management and Auditability Reform......................... 69
Witness Responses to Questions Asked During the Hearing:
Mr. Rigell................................................... 73
Questions Submitted by Members Post Hearing:
Mr. Palazzo.................................................. 79
DOD'S PLANS FOR FINANCIAL MANAGEMENT IMPROVEMENT AND ACHIEVING AUDIT
READINESS
----------
House of Representatives,
Committee on Armed Services,
Panel on Defense Financial Management and Auditability
Reform,
Washington, DC, Thursday, July 28, 2011.
The panel met, pursuant to call, at 8:00 a.m. in room 2118,
Rayburn House Office Building, Hon. K. Michael Conaway
(chairman of the panel) presiding.
OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A
REPRESENTATIVE FROM TEXAS, CHAIRMAN, PANEL ON
DEFENSE FINANCIAL MANAGEMENT AND AUDITABILITY
REFORM
Mr. Conaway. Welcome to the inaugural hearing for the Armed
Services Committee's Panel on Defense Financial Management and
Auditability Reform.
The panel met to organize on July 13th and had our first
informal briefing last week. We have adopted an organizational
plan, including a detailed work plan, to assist us in examining
the progress the Department of Defense has made in improving
financial management and achieving audit readiness and
identifying the challenges that remain.
Without objection, I would like to enter the organizational
plan into the record for today's hearing.
[The information referred to can be found in the Appendix
on page 69.]
Mr. Conaway. But more important are the details of our
oversight agenda. Chairman McKeon and Ranking Member Smith have
charged this body with making recommendations and providing
continuity of leadership on this issue.
Therefore, I would like to take a moment to introduce each
of the panel members and thank them for their commitment to
join Rob and me as we continue to work on the previous Defense
Acquisition Panel.
In addition to my partner, Rob Andrews of New Jersey, the
following members will serve on the panel: Scott Rigell from
Virginia; Joe Courtney from Connecticut; Steven Palazzo of
Mississippi; Tim Ryan of Ohio; Todd Young of Indiana.
They will be embarrassed that they weren't here to hear
their names read and bragged on, and all that kind of stuff.
The first question on the panel's work plan addresses whether
DOD's [the Department of Defense's] current financial
improvement and audit readiness strategy, methodology and
timeliness are appropriate.
I feel this is the appropriate starting point as DOD has
initiated numerous efforts over the years to address its
financial management weaknesses and achieve audit readiness
with little or no success.
In fact, for over 20 years now, GAO [Government
Accountability Office] and DOD auditors have continued to
report significant weaknesses in DOD's ability to provide
timely, reliable and useful information for decisionmaking and
reporting.
In these difficult fiscal times it is absolutely crucial
that DOD has reliable information to manage its resources.
Having reliable information is essential, is especially
critical, as DOD attempts to implement the $178 billion in cuts
and efficiencies proposed by the former Secretary of Defense,
not to mention how important it is for DOD, it will be, if DOD
is forced to look for further significant cuts in the near
future.
The Department of Defense also needs to provide assurance
to the American taxpayer that they are not wasting resources.
However, because of DOD's poor internal controls, the financial
management area has been on GAO's list of high-risk programs
that are vulnerable to waste, fraud and abuse since 1995.
The Defense Authorization Act of 2010 requires that DOD's
financial statements be ready for audit by no later than
September 30, 2017.
Today we will hear about DOD's strategy and methodology to
get the Department of Defense to audit readiness by 2017 and
the challenges that the Department faces to achieving that
goal. We do not expect to discuss all the challenges DOD is
facing in great detail in this hearing, but it is a good
starting point to understanding what the Department is up
against in its financial improvement efforts.
I expect the panel to hold future hearings that will cover
in much more detail the challenges that the Department is
facing in their efforts to resolve the issues.
I would like thank our witnesses in advance for their
testimony and agreeing to be here at such an early hour. Our
witnesses today are the Honorable Robert Hale, Under Secretary
of defense, comptroller; the Honorable Elizabeth McGrath,
deputy chief management officer, Department of Defense; Mr.
Asif Khan, the director of financial management and assurance
at GAO.
I would now like to turn to Rob Andrews for any remarks he
would like to make.
Rob.
[The prepared statement of Mr. Conaway can be found in the
Appendix on page 29.]
STATEMENT OF HON. ROBERT ANDREWS, A REPRESENTATIVE FROM NEW
JERSEY, RANKING MEMBER, PANEL ON
DEFENSE FINANCIAL MANAGEMENT AND AUDITABILITY
REFORM
Mr. Andrews. Well, good morning to my colleagues.
Good morning, ladies and gentleman. We thank you for your
attendance at this early hour.
I want to thank Chairman Conaway for his leadership on this
panel. It has been a pleasure to work with him the last couple
of years, to roll up our sleeves, and I am very much looking
forward to continuing that effort.
And I also wanted to take a minute and introduce
Congressman Jim Cooper, who is a member of our full committee,
who is the ranking member on the Oversight Committee, who I
commend for having the zeal to be here at this hour to
participate in this.
You can't make good decisions without good information. And
when it comes to the complexity of the Department of Defense,
you can't have good information without financial statements.
And we don't have them.
Now, most people hear that and think that is the result of
some sinister conspiracy to hide money or this or that. That is
simply not true. What is true is that the Department of Defense
is probably the most complex organization in the world. It is
actually multiple organizations under the same organizational
rubric.
It does just about everything, and it is organized just
about everywhere, so--and it is this sui generis organization.
You know, the way you value a hotel or a shopping mall is not
the way you would value Andrews Air Force Base, a very well-
named installation here in the country.
[Laughter.]
So I want to dispel from the outset the notion that the
reason we don't have these statements is some military-
industrial conspiracy to hide things from the public. That is
not true.
What is true are two other things. One is that it is a
complex task to figure out how to get from where we are today
to where we need to be, which are good, auditable financial
statements.
But the second is it is doable. And I think you are going
to hear from this panel today that these are folks involved in
getting it done. And the briefing we had last week shows that
there has been a sincere, concerted, focused effort from
Secretary Hale and his team.
And we are anxious to try to be a resource in making that
happen so that the members of Congress and the public can make
well-informed decisions about future expenditures in this
Department.
So I look forward to hearing what the witnesses have to
say, and I am glad to join you this morning.
Mr. Conaway. Well, thank you. With that, I will turn the
microphones over to the panel, whoever wants to start, however
you want to do it.
So, Bob.
STATEMENT OF HON. ROBERT F. HALE, UNDER SECRETARY OF DEFENSE
(COMPTROLLER), U.S. DEPARTMENT OF
DEFENSE
Secretary Hale. Well, good morning, Congressman Conaway,
Congressman Andrews, members of the panel. Thank you for the
opportunity to testify this morning on financial management
improvements at the Department of Defense.
Secretary Leon Panetta, our new Secretary of Defense,
shares your interest and mine in improving financial management
at DOD and has asked that I provide him a comprehensive review
of our efforts in the near future. And I look forward to
getting his personal guidance on this topic.
To bring you up to date on our progress, the Department's
Deputy Chief Management Officer, Ms. Beth McGrath, and I have
prepared a joint statement, which we have submitted for the
record. We will jointly summarize that statement. We are going
to do tag-team. I will start out. Beth will join midway on some
of the I.T. [Information Technology] system issues, and I will
finish up.
I believe that defense financial managers have three broad
goals. They need to help the Department acquire the resources
necessary to meet national security objectives. It is the key
goal, the budget goal, if you will.
Second, they need to ensure that once those resources are
enacted, they are spent in a manner that is legal, effective
and efficient. And that goal probably encompasses many that we
will talk about today.
And, third, they need to champion a strong financial
management workforce, because if we don't do that, we won't be
able to accomplish the other goals.
The first thing I would like to note is as we work to meet
national security objectives, DOD financial management has its
strengths. Mainly we are effective, in my view, in meeting the
needs of our warfighters--the financial management needs--
financial needs of our warfighters. And that is the key goal,
maybe the most important one for me.
We also have a dedicated workforce of more than 60,000
financial management professionals, and through personal
experience I can tell you they bring a culture of stewardship
to their jobs. They worry about whether or not this money is
spent effectively.
We also have effective financial processes in some key
areas. As a result, violations of key financial laws are few in
the Department of Defense. Timely and accurate payments are the
rule, and interest associated with late payments is quite low.
Financial managers have also made some progress on the
areas that I know of, and an area that I know is of particular
interest, I should say, to this panel, namely the financial
improvement and audit readiness area.
I am sorry, I am getting ahead of myself. There are some
other things that we do that I wanted to cover before I get to
the FIAR [Financial Improvement and Audit Readiness] plan.
We are working to try to improve financial information.
That is key. Partly in response to congressional direction, we
are working to improve information on the number and costs of
contractors employed by DOD.
We are also working to further improve training for
financial managers by implementing a course-based certification
program similar to the one available to or now in place for
acquisition managers.
Financial managers have partnered with the deputy chief
management officers to ensure implementation of proposed
efficiencies. Last year DOD proposed efficiencies in
streamlining totaling $178 billion in fiscal year 2012 to 2016.
We recently completed an internal review of plans for
achieving those efficiencies, and I am pleased to report that
the Services and agencies, I believe, are developing credible
plans and processes to meet these demanding goals. They are
clearly taking this effort seriously.
We have also made progress improving financial information
and achieving audit readiness. That is a topic I know that is
of particular interest to this panel. It is of particular
interest to me.
We have already achieved and are maintaining auditable
statements in some key entities--the Army Corps of Engineers, a
number of our defense agencies and several of our large trust
funds. But it is also clear that the greatest audit challenges
lie ahead, especially the need to move the military services
toward auditability.
In addition, there are enterprise-wide weaknesses in DOD
financial management which require an enterprise-wide response.
To pass an audit, an organization has got to have systems and
processes that record financial results of business events in a
consistent and reliable manner.
Our processes and systems don't always meet that standard.
Many of the systems are old. They don't record information in
the level of detail that is required for an audit. Our
processes are sometimes variable across commands, even across
bases.
These issues are especially challenging in the Department
of Defense, because DOD's enormous size and geographical
dispersion mean we just can't rely on manual solutions or
workarounds, as many other agencies have been able to do.
To deal with these enterprise challenges and to improve
financial information and achieve audit readiness, we revised
our approach that we have taken--and obviously it hasn't
worked--over the past 17 years since the Government Management
and Reform Act.
Since August 2009, our emphasis has been on improving the
quality of our data and moving toward audit readiness with the
information that we use to manage the Department every day--
specifically, budgetary information, because we manage the
Department based on budgets, and the accounts and location of
our assets, which is key to our warfighters. Auditors call it
existence and completeness.
We have also put in place a cost-effective approach for
dealing with other information required for full auditability.
Less than 2 years have passed since we launched this new
approach. I can say without hesitation or reservation,
financial auditability is now readily acknowledged as a high
priority in the Department, and that was not true in some
previous terms that I have served in the Department. And we
have made noteworthy changes.
We have a clear governance process. There is somebody in
charge here. It is the Chief Management Officer, the Deputy
Secretary for the Department of Defense, supported on a day-to-
day basis by the Chief Financial Officer--me--and also the
Deputy Chief Management Officer and an analogous organization
at the service level, the CMOs [chief management officers], the
under secretaries in that case in charge, aided by their
assistant secretaries for financial management and also the
deputy chief management officers.
We have established long-term and, more importantly, short-
term goals, which are actively managed by our governance
process. We need to have goals that we can check are happening
over the next couple of years, not just 2017.
We ensured that each military department has programmed
adequate resources to support this refocused strategy, and they
have done that over the full Future Years Defense Plan [FYDP],
so out 5 years.
We now require that senior executive performance appraisals
for both financial and nonfinancial personnel include financial
audit goals where they are relevant. So we are trying to get
this outside the comptroller community.
We are assembling teams within each military department
that will be tasked with improving financial controls. I have
told you, they are too variable and sometimes they don't meet
our audit standards. We have got to fix them. The systems will
help, but they alone are not this full solution.
We are in the process of establishing a course-based
certification program for defense financial managers that I
hope will provide a framework and, among other things, ensure
that we provide training to our people on accounting and audit
issues.
And we have maintained a close working relationship with
our oversight bodies, including the Government Accountability
Office and the Department's Inspector General. I have
personally briefed Gene Dodaro, the Comptroller General, on
this plan, also Gordon Heddell, the DOD IG [Inspector General].
In addition, we have focused on improvements in business
systems, and I would like now to ask my colleague, Beth
McGrath, to discuss our system efforts.
STATEMENT OF HON. ELIZABETH A. MCGRATH, DEPUTY CHIEF MANAGEMENT
OFFICER, U.S. DEPARTMENT OF
DEFENSE
Ms. McGrath. Good morning. I do appreciate the opportunity
to discuss financial management improvements at the Department
of Defense.
As the Deputy Chief Management Officer, I am responsible
for instituting a framework that clearly defines business
goals, develops meaningful performance measures and aligns
activities through established and repeatable processes.
The purpose of DOD's overarching management agenda is to
establish an effective, agile, innovative business environment
that is fiscally responsible.
This business environment includes many IT solutions, which
are essential enablers of a broader set of innovative business
operations, rather than an end only unto themselves. While I
acknowledge past challenges, there are number of things that we
are doing, putting together these programs to ensure that they
are on the right path.
To ensure that the future programs are structured for
success, we are deliberately tying acquisition decisions on our
major programs with business outcomes, such as financial
auditability.
We are ensuring a program's complete proper business
process reengineering to make certain we are not automating
inefficient processes and that the Department is prepared for
the new system and the process prior to implementation.
By analyzing business investment from a cross-functional
perspective, Mr. Hale noted that we are ensuring that the
financial auditability goals are part of other than financial
managers' performance appraisals. It is because of their
significant contribution to our ability to achieve audit
readiness. That takes everyone. Every functional area must
participate.
We are adopting a concept of end-to-end processes and
standard development methodologies into the business enterprise
architecture, together this will enable a more holistic way of
thinking into the management of our business operations and
ensure we have a shared understanding of our architecture so
that we can achieve the interoperability that we are
discussing.
We are implementing a new acquisition process for our
defense business systems that are tailored to meet the
requirements of the business area. Guidance for this process,
called the business capabilities life cycle, has been released
and is being used today.
Our goal is to deliver a streamlined 21st century systems
environment consisting of I.T. capabilities that work together
to support efficient, effective business operations.
I would like to note that GAO's removal of the DOD
personnel security clearance program from its high-risk list is
a significant first in the Department. And it owes its success
to our commitment to this results-oriented, end-to-end approach
that I just described.
In closing, we are committed to improving management and
acquisition of I.T. systems, as it contributes to the overall
business operations, again, to include financial auditability.
These issues receive significant management attention and are a
key part of our overarching strategy to build a better business
environment, business processes and systems that create results
our men and women in uniform need.
I look forward to continuing our work with this panel as we
strive together to a greater efficiency and effectiveness and
to create an agile business space enabled by modern,
interoperable I.T. solutions. I look forward to your questions.
Secretary Hale. Okay. So we have made a lot of process
improvements in business systems, governance, funding. But I
want to do more than that. We need to actually start doing some
audits and validations. It will focus us on the real problems.
And so we have begun doing that. We have launched an audit
of the Marine Corps' statement of budgetary resources. If
successful, this would be the first time any military service
has actually completed an audit of a financial statement. And
we are learning a great deal.
We have brought an independent public accountant in--and
they do this for a living, so they know what the problems are.
We have learned so much from that audit already.
In May, we began a DOD-wide examination and validation of
our funds control and distribution process. It is known in
audit terms as appropriations received. Again, an independent
public accounting firm is doing that for us. I expect this
validation will yield positive results next month.
Periodic validation of our funds control process is very
important to me. It also should be important to you, because it
will reassure you that we are issuing and controlling our funds
in ways that ensure we comply with the laws that you enact.
In June, we began a validation by a public accounting firm
of the Army's new General Fund Enterprise Business System, its
enterprise research planning system, GFEBS, at those bases
where GFEBS has been installed and is mature.
This is also very important, because it will identify areas
that must be improved--and there are going to be some, I am
sure--to be sure that we are using that system in a manner that
is auditable. I am not so worried about the system. I am
worried about all the feeders and the processes that are
associated with it.
And I don't want to get these systems deployed throughout
the Department of Defense and find out, or have somebody find
out 3 or 4 years from now, that they are not auditable. So we
will cycle through the other Services with that same approach
as we can.
In July, we tasked the public accounting firm to validate
the Air Force's processes and controls to reconcile their
accounts with Treasury, essentially our checkbook with
Treasury. It is called funds balance with Treasury. And, again,
another key step, and I am cautiously optimistic we will get
positive results there.
And by the end of this calendar year, we expect to begin
several other validation efforts, including accounts and
locations of large portions of our military equipment.
In short, I would tell you there is still a lot to do. I
have focused on the positive side, but I am not naive. We have
got a long way to go. There are still enterprise-wide
weaknesses that we have not resolved. We need to institute a
culture of financial controls in the Department, consistent
ones that don't yet exist.
But we are committed to improving financial information and
audit readiness in the Department of Defense, and I believe we
have made significant progress. Our goal is to achieve fully
auditable statements by 2017.
That concludes our opening statement, and after Mr. Khan
finishes, we welcome your questions.
[The joint prepared statement of Secretary Hale and Ms.
McGrath can be found in the Appendix on page 32.]
Mr. Conaway. Mr. Khan.
STATEMENT OF ASIF A. KHAN, DIRECTOR, FINANCIAL MANAGEMENT AND
ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Khan. Thank you.
Good morning, Mr. Chairman, Ranking Member Andrews and
members of the panel. It is a pleasure to be here today to
discuss DOD financial management improvement efforts and how it
is going to achieve auditability.
At the outset, I really want to thank this panel for
inviting us here. We believe that focused attention, such as
these panels, is the key to corrective actions within the
Department of Defense.
In my testimony today, I am going to be providing GAO's
perspective on the status of DOD's financial management
weaknesses and the efforts to resolve them.
In addition to that, I will also touch upon some of the
challenges, which DOD continues to face in improving its
financial management operations. My testimony is based on our
prior work within the Department of Defense.
Regarding the status, for more than a decade, DOD has
dominated GAO's list of federal programs and operations at high
risk, due to their susceptibility to fraud, waste, abuse and
mismanagement.
In the last 20 years, as a result of significant management
weaknesses, none of the DOD military departments--Army, Navy or
the Air Force--have been able to prepare auditable financial
statements.
DOD's past strategies for improving its financial
management have generally been ineffective. But recent
initiatives and what we have heard this morning are encouraging
and show promise.
Specifically, recent changes to the DOD plan for financial
improvement and audit readiness, the FIAR plan, if implemented
effectively, could result in improved financial management and
progress toward auditability. The Army, Navy, Air Force and the
Defense Logistics Agency have key roles in implementing the
plan.
However, DOD does face many challenges in overcoming its
longstanding financial management weaknesses. I am going to
briefly highlight six of these major challenges.
The first one, one of the toughest challenges in
implementing the FIAR plan is sustaining committed leadership.
The DOD comptroller has expressed commitment to the FIAR goals
and has established a focused approach to achieving the FIAR
long-term goals that is intended to help the DOD achieve near-
term successes as well.
To succeed in the long-term efforts to improve, financial
management needs to be cross-functional. DOD agencies and
offices that perform business functions--for example, weapon
system acquisition, and supply chain management--have to work
together, as financial management function is dependent on the
information received from these two functions and, vice versa,
these two functions also need financial management information
in order to perform their functions effectively.
However, within every administration and, of course,
between administrations there are changes in leadership. It is
paramount that the FIAR plan and other current initiatives be
institutionalized throughout the Department at all working
levels.
The second one is a competent financial management
workforce, with the right knowledge and skills, is needed to
implement the FIAR plan. Effective financial management
requires a knowledgeable, skilled workforce that includes
individuals who are trained and well-versed in government
accounting practices and information technology.
Analyzing skills needed and then building and retaining an
appropriately skilled workforce are needed for DOD to succeed
in its transformation effort.
The third one is the accountability and effective oversight
of the improvement efforts. DOD has established bodies
responsible for governance and oversight of the FIAR plan
implementation. It will be critical for senior leadership in
each of the DOD components to ensure that oversight of the
financial improvement projects and efforts is effective, and
that responsible officials are held accountable for the
progress.
Fourth, a well-defined enterprise architecture. For DOD, a
key element of modern financial management and business
operations is the use of integrated information systems with a
capability of supporting a vast and complex business operation.
A well-defined enterprise architecture will be needed as
DOD blueprints for modernizing its business systems. However,
DOD has yet to address previously identified issues associated
both with the architecture and investment management.
The fifth one, which is linked to the prior points I have
made, is enterprise resource planning, or ERP systems. These
are expected to form the core of the business information
systems and the DOD components. Their effective implementation
is effective to improving DOD financial management and related
business operations, and will be key to becoming auditable.
However, the components have largely been unable to
implement ERPs that deliver the needed capability on schedule
and within budget. Effective business system modernization
across DOD is key to achieving hundreds and millions of dollars
in annual savings.
Finally, weaknesses in DOD's internal controls over
financial management are a pervasive and primary factor in
DOD's inability to become auditable. DOD needs a practical
approach to prioritize these internal control weaknesses and to
correct them within a reasonable period of time.
In closing, I am encouraged by the recent efforts shown and
the commitment by DOD leadership, however the Department's
ability to address these six weaknesses, or the six major
challenges, that I have highlighted today will be a major
factor in reaching auditability.
Mr. Chairman, these are my remarks for the morning. I will
be happy to answer any questions that you have. Thank you.
[The prepared statement of Mr. Khan can be found in the
Appendix on page 43.]
Mr. Conaway. All right, Mr. Khan.
Thank you, panelists.
Without objection, I think everybody will go on the 5-
minute clock so that we get a lot of the way through. So I will
start us.
Bob, yesterday you talked to the Senate about the most
recent analysis on the FIAR, that you had made 5 of the 25----
Secretary Hale. You had a spy there, sir.
Mr. Conaway. We pay attention, or try to. Five of those
short-term goals and you have now extended 20 of those. Were
there consequences to the folks who did the 5 versus the folks
who did not get the 20? Is your accountability system in place
yet to hold managers accountable for that? Has it been
implemented?
Secretary Hale. You know I think we are still getting the
point there, and certainly nobody was fired and shouldn't have
been in that regard. Many of those were interim goals. As I
have told you we have met a number of them. We are going to
meet within this fiscal year the key goals that concern me--the
appropriations received, funds balanced with treasury, the
GFEBS, and continue with the Marine Corps audit.
We did miss some of the interim goals and, frankly, it was
probably because we didn't plan them well, so I think at this
point I don't feel disciplinary action is appropriate. I think
encouragement is what is appropriate. We are making progress.
I was taken aback by the numbers, but I believe she was
right, Mr. Chairman. Senator Udall had made that comment
yesterday. We did miss a number of the interim goals, but I
think we have hit the key goals, at least within the fiscal
year.
And we have got to pick up the pace. I understand that. I
am hoping for a learning curve here, both in terms of our
ability to plan what we can carry out, but also our ability to
know how to do it.
Mr. Conaway. Let me pivot over to Ms. McGrath, then. The
senior executive staff--what is the S for, the SES, Senior
Executive----
Ms. McGrath. Service.
Mr. Conaway [continuing]. Service now has performance
measures built into their evaluation process. Have you been at
it long enough to have gone through a cycle yet where you put
the SES folks through a specific analysis of what their
performance goal was versus what they did?
Ms. McGrath. Sir, we certainly did that during last
performance year's cycle at the, lets say, at the OSD [Office
of the Secretary of Defense] level. They were proliferated
across the OSD, and they were established for the military
departments going into this year's cycle. And we are just at
the tail end of this performance year.
Mr. Conaway. Can you talk to us about what did and didn't
happen to folks who either had a satisfactory performance
against the goal they were assigned or did not have
satisfactory performance? Any actions taken at this stage?
Ms. McGrath. So, certainly, the overall performance. The
Department has embedded financial audit goals into its
overarching----
Mr. Conaway. Right, but try to get down to the individual
level, because----
Ms. McGrath [continuing]. Performance----
Mr. Conaway. Has anybody actually been--yet--held
accountable for not getting something done they were supposed
to get done?
Ms. McGrath. So, I would say yes. The Department's overall
performance against all of our goals, it would contribute to
their--I will call it their bonus calculation. So those have
been in place, and what we have done in the existing year is
proliferated them outside the financial space. So the short
answer is yes, they have. They have been in place.
Mr. Conaway. Given that it is inappropriate to share
individual names in here because of the privacy issues, I do
think it is going to be helpful to those on the panel to see
where--at least some statistics that folks who didn't meet
their goals were not as well--they did not get compensated for
not making those goals, and folks who did make those goals are,
in fact, compensated. So that would be one of the things that
we look at.
I want to talk briefly in my time remaining on legacy
systems. The folks on this side of the table are trying to
figure out ways to kind of watch what goes on. The folks on
your side of the table will know abundantly more about what is
going on than we will. One of the measures that I am going to
try to focus on and look at is continued legacy systems.
We asked some folks in the Army yesterday once they got the
GFEBS done across all 211 sites, having legacy systems would go
away. There are about 150-something sites now, so there would
be a ways to go. But at some point, we need to do a meaningful
job in the number of legacy systems being maintained.
So is that a good tracking metric, Bob, or not?
Secretary Hale. I think it is. I am going to ask Beth to
add to that, because it is more in her lane. But I believe it
is. You will need to be patient, and GFEBS made a decision not
to try to bring all the old data, past data, into the system.
That greatly speeds up our ability to deploy this.
It also means that for a period of time we are going to
have to operate the old systems so that we can keep track of
the legacy data, if you will. So it will be a number of years
before they go away.
The other Services have chosen a different approach. That
is to bring the old data into the system. That means a huge job
of data cleanup, which just slows the implementation.
I am not sure which one is right, you know. I will go with
their judgments, but yes we do need to get rid of legacy
systems there.
Ms. McGrath. But I would add that we currently published an
enterprise transition plan that identifies our target solutions
like the Army's accounting solutions, GFEBS solution that we
have talked about a couple of times.
In the enterprise transition plan, it identifies sunset
dates for the legacy systems associated with the implementation
of GFEBS. And so we do identify those with dates, and we
monitor those as well--again, tied to auditability but also
reducing and rationalizing our overall I.T. footprint.
Mr. Conaway. Thank you. Rob, for 5 minutes.
Mr. Andrews. Well thank you for the testimony. It appears
that there has been some substantial progress in the Marine
Corps area, Secretary, which you referred to. What are the
lessons learned from that? What has led to the relative better
progress in that area? I am sure it is a smaller organization.
That has a lot to with it. But what has led to the better
progress there? And what have we learned that still need to be
done there?
Secretary Hale. Well, I think the reason, and you know,
frankly, the Department of Navy in general is ahead. All of the
other Services are working to catch up. The inter-service
rivalry is a very powerful tool in the Department.
Mr. Andrews. We have heard this.
Secretary Hale. And I will work this whenever I can. I
learned that as the Air Force F.M. [Financial Manager]. And the
Navy has been investing steadily over the past 5, 7 years. That
is why they are ahead. And the Marine Corps in particular has
strong commitments, so----
Mr. Andrews. Investing in personnel training, software?
Secretary Hale. Both dollars, I think, and personnel,
both--and across the board, not just the Marine Corps, although
the Marine Corps is particularly focused. But we have learned a
great deal. I mean, we learned, first, that we don't know what
we don't know.
We don't really fully understand in the Department of
Defense what you have to do to pass an audit for military
service, because we have never done it. And you can't learn to
swim on the beach. It is hard to talk to other agencies that
tend to be different from us, so as the Marine Corps jumped in
to try to swim, they found out they had a number of problems.
Some of them were system related, although they have got a
pretty decent and fairly integrated system. The real problem is
with business processes. We are just doing some things which
are effective in terms of meeting war fighter needs, but aren't
auditable.
For example, we do bulk obligations of military pay. The
auditors want it done in a much more detailed fashion.
Sometimes we weren't doing basic and blocking and tackling
appropriately.
For example, we weren't taking people off access lists of
financial systems when they left the base. They were busy. They
didn't get to it. The auditors looked and said, ``Hey, there
are people here that shouldn't have access.'' So we have got to
correct those kinds of business processes.
Mr. Andrews. Does the Department of the Navy have more
people relative to the size of the organization working on this
problem, or do they have the same number of people doing it
more effectively?
Secretary Hale. I think they have in the past. Now I am
less sure, because the other Services have definitely bulked up
here, and in terms of funding, they are right up. I have kind
of used the Navy as a benchmark, as I have looked at the other
Services, figuring they are making progress, probably need
similar resources. And the other Services are coming up to that
level.
Mr. Andrews. Mr. Khan, one of the things that you have
mentioned in your testimony is major weapons system maintenance
and operating and support costs. Do you have any suggestions as
to how we might require estimates of those operating support
costs be billed into the up front statement of the weapons
system?
In other words, one of the problems that has plagued us for
a long time is we buy a weapons system and it winds up costing
an awful lot more than we thought it was going to--in part,
because of the requirement creep, in part because of other
problems, but I think also in part, because we understate the
operating and support cost.
What suggestions do you have that we might require bidders
to build into their costs so that we can more accurately
anticipate what is coming?
Mr. Khan. I mean, certainly this issue starts with process,
really, that start in acquisition.
I am sorry, can you hear me now. I am sorry.
It does start in the acquisition process and what Ms.
McGrath mentioned that DOD is implementing, an end-to-end
process so that when you have a procurement, when you raise a
purchase order, you begin to collect all the data which is
necessary for accumulating the actual cost which is going to be
spent on that particular product itself.
So, I mean, in our work, we have seen that. That is slow to
happen in acquisition to link that up with capturing the cost
information, which can be meaningfully built into, if you will,
a profile, whether its weapon systems or even in the large
system acquisitions.
I think that will go a long way towards having more of a
discipline so that you can true up the estimates with what the
actual costs are.
Mr. Andrews. Your agency did a compelling study that said
we were $297 billion in cost overruns in seven major weapons
systems, I believe it was. Could you just guess what percentage
of that $297 was misunderstanding of support and maintenance
costs?
Mr. Khan. That would be a tough guess. I am sorry.
Mr. Andrews. If you would supplement the record later, I
would be curious.
Mr. Khan. Okay.
Secretary Hale. I believe I would let GAO supplement it,
though. That was looking at--those were the selected
acquisition reports, and they were looking at the procurement
on the investment costs associated with the weapons. I don't
believe that any of that was associated with that.
Mr. Andrews. I think you are right. I think I would modify
my question to say, could you make an interesting projection as
to what follow-on costs behind the $297 are going to come
because of this problem. That is a better way to frame it. It
may be worse, but----
Secretary Hale. May I add a brief point--may I add a brief
point to that?
Mr. Andrews. Sure.
Secretary Hale. A major issue in the Department has been,
as long as I have been associated with DOD, we tend to be
overly optimistic about projections of operating and support
costs, and we don't make decisions based on them. And you have
to make that decision very early in the life of a weapons
system to have any meaningful effect.
In some cases we are paying for game-changing capabilities.
I think stealth capability has been extremely costly, because
every time you exercise with a weapon and it hits a rock or a
bird, you have got to recode it. If you have to do maintenance,
you have to recode it. It is very expensive.
On the other hand, it has been a war fighter game change.
So I wouldn't always say higher operating costs are a bad idea.
You have to judge them against what you get.
Mr. Conaway. Thanks, Rob.
Scott, for 5 minutes.
Mr. Rigell. Thank you Mr. Chairman.
I certainly thank our panel for getting up early.
Mr. Chairman, I commend you for starting on time. I think
in my 6 months here, this is the first and only meeting that
has actually started on time. I am impressed by that.
I also want to thank the Ranking Member Andrews. I think
the tone that has been set here is the tone that we need set. I
think it is actually, if I can go as far as to say, it is
beyond bipartisan. It is just American, you know, us trying to
get our hands around this and work together.
And I think that we are here today talking about the
challenges faced in the accounting of DOD is of no surprise,
given the rapid increase in funding and the mission that was
given to DOD after 9/11.
Mr. Hale, I wanted to ask you, given the complexity of DOD,
it seems like this of all endeavors we would have to slow down
and be very thoughtful and very strategic about how you get
your arms around this challenge here.
And have you identified global challenges, those barriers
that inhibit our ability to produce audited statements and on a
global scale, but identified maybe a smaller sector that we
could go after and see if we could get real success in a
smaller sector?
I know the government likes to have these acronyms and
things like a center of excellence and then ramp it up and move
across. Now, I don't know if that is a profound statement at
all. You may have done that. Maybe that is reflected in the
success that you have had in the Marine Corps. But if you could
comment on that, it would be helpful to me.
Secretary Hale. First off, we have been pretty good at
slowing down over the years. I am not working to do that. I
would like to speed up.
There are two broad problems that we have had in the
challenges we face. I would say one is better systems.
Especially the Army and Air Force feel that their current
systems simply cannot support auditability. Now I will give you
just one example to try to make that more concrete.
These systems don't keep track of data at the invoice
level. And so when an auditor wants to check our payment, they
want to see an invoice. They want to see a contract that backs
up that invoice. They want to see a receiving report. Right now
what we have to do if we are going to audit that is manually go
out and get those documents.
And when you are doing samples of thousands, you can't do
it in a timely fashion. The new systems keep track of this data
so you literally can hit a button, if it is working right, and
you will have the data available. So especially the Army and
Air Force feel they must have a new system. So that is one
global problem.
The other ones are business processes or financial controls
which are too variable and in some cases not strong enough to
support audits. I mean, I would say they are reasonable. I know
where we are spending the money in budget terms, and I would
argue with those who say differently. But they aren't good
enough to support audits.
So we are going to have to improve them. We are working on
teams to try to identify those and get our commands to start
making changes now at the same time they are doing the systems.
I don't want to do this--I don't want to do it--I want to do it
concurrently, not sequentially.
Finally in terms of your--you have hit exactly what we are
trying to do. We are trying to do this in a phased manner. The
Marine Corps is a good first step, and these validations are
also looking at pieces of this. And so we will learn, and I
hope build up some successes, as well as areas where we need to
improve.
Mr. Rigell. I appreciate the answer. Maybe the second part
of the question is still a bit unclear to me.
Have we identified a smaller sector, maybe a division, a
branch to say this is the one that we are really going to do
very, very well, and then we are going to scale this up--
lessons learned, best practices. And has that been done? Or is
it more you are trying to get your arms around the whole thing?
Secretary Hale. No, I think we have done exactly what you
are saying. First, we picked budgetary information as our major
focus. And the reason we did that is because it is most used to
manage. Then within that, the Marine Corps is our smallest
service. It is also the least complex, because the Navy handles
a lot of its procurements. And so it is a good starting point,
and we are learning a great deal.
But I don't want to just focus on the Marine Corps and have
the Air Force----
Mr. Rigell. That is okay. I think I----
Secretary Hale [continuing]. And the Army sit over there
and do nothing.
Mr. Rigell [continuing]. A lot of Marines on the panel.
That is okay.
Secretary Hale. We are counting on the Marine Corps for a
financial beachhead and to hold it, too.
I want the other Services to be active. We can't audit
their whole statement yet. We are not close enough to do that.
So that is why we picked these validations. We are picking
pieces that are key--the Air Force for funds balance with
Treasury, the Army to look at its systems----
Mr. Rigell. I am not----
Secretary Hale. We have a phased approach--we call them
waves----
Mr. Rigell. Okay.
Secretary Hale [continuing]. That attempts to do this.
Mr. Rigell. Thank you.
In my remaining 15 seconds, could you provide the
committee--we may have this; I don't believe we do, though--
could you provide the committee with the observations and
recommendations from the outside auditors? And I am not talking
about reams of papers, but if you could condense that,
summarize it.
What are the outside auditors, to the extend that that can
be summarized in, you know, four or five pages, and
specifically if there were any legislative--and this may be
going to the end of the book, the last page of the book, but
are there any legislative suggestions that they may have made?
Thank you, Mr. Chairman.
Thank you, Mr. Hale.
[The information referred to can be found in the Appendix
on page 73.]
Mr. Conaway. All right thanks.
Tim, 5 minutes.
Mr. Ryan. Thank you, Mr. Chairman.
I am reading here through the GAO report, and one of the
issues that they brought up here is the limited ability to
identify, aggregate and use financial management information
for managing and controlling operating and support costs.
What are you specifically doing to try to get that more
information? And how much of that--I would imagine a good deal
of it--you will be interfacing with contractors to try to get
that information?
Secretary Hale. Yes. Certainly, in some cases we will use
contractor support, although the overall process has to be led
by government employees.
First, I would say that for budgetary information, I mean,
when you make an appropriation to us, we can track whether or
not we meet that appropriation. The appropriations received
that I spoke of is the process we use at the start to
distribute the money in a manner consistent with the laws the
Congress enacts.
And then we do have ability to track that. And I can go
through--you heard it when I was giving the briefing a week
ago; if you want I will go through it again--but there is some
external corroboration of that. We have about 3,000 auditors
watching every program and financial move.
Generally, our violations of the Anti-Deficiency Act, which
essentially says you weren't doing what the law told you, are
quite low--very much lower, I might add, than nondefense
agencies taken as a whole. So I have reasonable confidence in
the data, that we know where we are spending the data as you
tell us.
What gets hard is when you want to start getting cost data,
which is very important. When you want to figure out what the
JSF, Joint Strike Fighter, costs to operate, that requires
special studies. Our systems just can't do that.
We can do the studies, but they take time, and so we need
to improve there. And overall, we do need audits to verify that
the information is correct. Now, I am pretty sure it is in the
right spots and, therefore, I have reasonable confidence in the
data we are using to make decisions. But I fully accept that we
need audits to verify that point.
Mr. Ryan. So, well, I am not an accountant, so I am trying
to----
Secretary Hale. Neither am I.
Mr. Ryan [continuing]. Wrap my brain around this. You are
not getting enough good information. Is that fair? Is that what
the GAO is saying here?
Secretary Hale. Certainly----
Mr. Ryan. So what are you doing to get more information to
eventually figure this out?
Secretary Hale. I would say its in some cases we don't have
good information, and overall we don't have audits to verify
the quality of that information. There are some good points,
like I said. I think our budgetary information--when you
appropriate something in Army weapons and track combat vehicles
and tell us to spend it a certain way, we can track that.
Mr. Ryan. But what it says here--and maybe GAO would like
to chip in here--I mean, what your report here is saying is
that this is a repair costs, maintenance, contract services. It
seems--feel free to chime in, too--you know, it seems like
those are pretty standard requests to know, okay, on the Joint
Strike Fighter what are the repair costs? What are the
maintenance costs?
And I am having trouble figuring out what the issue is
here.
Mr. Khan. Let me just--oh, I am sorry. Turned that off.
Let me just build on my response to Mr. Andrews' question.
The issue is cost here. I mean, DOD does have very good
estimates, which they have developed themselves. But they have
to be trued up with the actual cost information.
And that is where acquisition process comes into it,
because they are the primary people dealing with the
contractors. So it has to be set up front the expectation with
the contractors that they need specific cost information to be
broken down in a certain way, which DOD systems and DOD
processes can take into their systems to be able to develop
that and match that with the estimates.
Mr. Ryan. Okay. So are we doing that with the contractors
now?
Ms. McGrath. So part of the today's environment, as Mr.
Hale has articulated, the systems weren't designed to do cost
accounting. And I am not an accountant either. But as Mr. Hale
also articulates, we know where the money goes. It is the
actual costs of doing, you know, repairs and those kinds of
things.
Mr. Ryan. Right.
Ms. McGrath. And so the enterprise resource planning
systems, many of those systems that we have been talking about,
the target solutions are being designed such that we can
capture that cost information, have the actual data that says
that we can do forecasting for maintenance and sustainment of
those systems, so that we are actually using real data to
establish both our inventory needs and our forecasting.
So it is a long way of saying that we are through the
development of the business center enterprise architecture. We
are developing standard financial information standards along
with logistics based standards to ensure at the end of the day
that we can aggregate the data, have the cost information so
that, you know, that we can have those estimates that GAO has
articulated that we don't currently have today.
Mr. Ryan. Okay. I am out of time.
Thank you, Mr. Chairman.
Secretary Hale. If I can take one more shot, because I
don't feel I have been helpful.
Let me take the JSF as an example. If you want its
operating costs, you are going to have to look at our personnel
information, you are going to have to look at our day-to-day
operation and maintenance information, you have to look at
spare parts.
Those all are in separate appropriations. If you wanted
that now, you could not punch a button and get it. You would
have to get a team of experienced analysts to go in, look at
the budgetary data in those categories, in some cases estimate
what portion were attributable to the JSF and come up with that
data.
When you are done with that study, I think you would have
reasonable information to make a decision, but it is slow, and
we don't have an audit that verifies that all of the
information is correct.
So it is a nuanced answer. Yes, I can get something that
would help the commander make a decision, but it will take a
long time, and it will require specialized expertise,
contractors and others. And, again, there is no audit to verify
its capability.
I hope that is helpful. It is not a black-or-white answer.
It is not that we don't have any information. It is just not as
readily available, and sometimes it is not as high quality as I
would like.
Mr. Conaway. It is still a good rationale for continuing
pushing on this issue to get this done at the end of the day.
Secretary Hale. Yes, but, you know, to be honest, even if
we got an audit, it wouldn't solve----
Mr. Conaway. No, no, no, but you can have systems in place,
and you would sustain the audits and do those kinds of analysis
quicker----
Secretary Hale. You will have----
Mr. Conaway [continuing]. More nimble
Secretary Hale [continuing]. Somewhat quicker, yes.
Mr. Conaway. And so, Todd Young for 5 minutes.
Mr. Young. Thank you, Mr. Chairman.
Thank you to all our panelists. I do appreciate you being
here early this morning.
Mr. Khan, I appreciated your six pillars, if you will, of
change that, as you see, must occur in order to really begin to
tackle this challenge in a serious way.
I would further reduce those into a few different buckets,
if you give me liberty. One would be processes, another would
be systems, and then, finally, we have people. And you have put
people first in terms of your comments. I don't know if these
were order of priority, but it strikes me they were.
Certainly, if we are going to have any sort of lasting
change here, we are going to have to have sustaining, committed
leadership. We are going to have to institutionalize whatever
plans we develop here, and we also need people with the
appropriate skill sets to be able to add some value to this
overall process.
And so I would ask you or anyone here on the panel, what we
have done first to try and--from the beginning, I think we need
to be thinking about institutionalizing whatever plans are put
in place here. So what have we done to ensure that we are going
to have sustaining, committed leadership across
administrations, with respect to the FIAR plan?
And then, secondarily, what is being done with respect to
assessing the skills needed within DOD in order to make sense
of this and to then build that skilled workforce?
Secretary Hale. Perhaps the biggest concern of mine is
sustained commitment to this over time. That really depends
on--and we have got it right now. I care about this. I learned
it in my Air Force F.M. days. I cared about it then. I care
about it now.
But, frankly, the people that sit in my chair have
generally been--I like to use the phrase ``budget junkies.''
There is a heavy focus on budget. And I consider myself a
budget junkie. I am working constantly, watching what you are
doing right now to the budgets. I am very concerned.
So it is important that we have somebody that is my
successor or somebody at senior levels who knows something and
cares about the audits. I won't be able to do anything about
that. I would urge you to do what you can to ensure that. And
it will, obviously, be very important that the deputy secretary
and the secretary care about it as well. Sustained leadership
over a couple of administrations will be required to make this
happen.
Let me turn to the workforce. I think, generally, there are
about 68,000 people in the defense financial management
workforce, roughly 58,000 government civilians, and about
10,000 of these in the so-called G.S. [grade scale] 500 series,
and about 10,000 military personnel. I think, generally, they
are well trained. But we haven't been as systematic about that
as I would like.
We are starting to do that in two respects: one, completing
a competency review--figuring out what they ought to know. I
think we generally knew that, but we have to be more specific.
And, second, we have asked for legislative authority, and
you have given it to us, as has the Senate, so I hope we will
come out of conference, to impose a course-based certification
program for defense financial managers, analogous to the
Defense Acquisition Workforce Improvement Act legislation for
acquisition, which would allow a framework.
And we would require certain courses for certain jobs. And
auditability and accounting would be one of them. So I believe
that it is, generally, a well-trained workforce, based on my
experience with it, especially at the senior levels. But I
think a more systematic approach would be appropriate.
You are scowling at me. Did I answer your question?
Mr. Young. Thank you. You did, and, actually when
sustained, committed leadership was said, I wasn't necessarily
thinking about just the top people in the organization.
And perhaps that is what you meant, Mr. Khan, but I thought
institutionally, things might be implemented so that we didn't
have a--it didn't require each administration to appoint
enlightened people. Maybe we could do things that would ensure
that they stayed focused on this problem.
Mr. Khan. Right, Mr. Young, I mean, that is why I
emphasized the human capital of the well-trained workforce. I
think that is going to go a long way towards helping
institutionalizing some of the topics we are talking about
today.
This is to drive transformation. This is change management
process. And without having a well-trained workforce in a very
complex environment, that is going to be a huge challenge.
I think Congress recognized that. There was a requirement
in National Defense Authorization Act of 2006 for DOD to
perform a skill set analysis, if you will, and then do a gap
analysis of what the to-be requirements are for the skill sets
and where they were currently and what the plan was to
transition.
So that is going to be key. I mean, it is a complex
environment, and then financial management itself is a
technically complex area. So you are dealing with several
different moving parts here, so the process and systems issue
has received attention, but human capital is equally important.
And without that the elements aren't going to come together.
Secretary Hale. But I don't think this will succeed unless
the secretary, deputy and comptroller and both OSD and the
Services care about it and make a high priority of it. It won't
happen.
Ms. McGrath. Can I also add, though, that we are, from an
institutional perspective, baking it into the summary
justification of the budget. So there are performance measures
that are identified as part of the budget submission. They are
part of the overall GPRA Modernization Act [Government
Performance and Results Modernization Act of 2010]. So these
are top priorities. It is part of the strategic management
plan.
We are utilizing the business enterprise architecture to
tie directly to achieving the financial auditability outcome,
leveraging the investment review board process, so when systems
do come in for development and modernization, there is that
connectivity.
And so from an institutional perspective, we are using all
of the levers that are there. That notwithstanding, I don't
disagree with Mr. Hale's point about the leadership, top-down
driven requirement must happen.
Mr. Young. Great. Thank you.
Mr. Conaway. Thank you.
To Joe for 5 minutes.
Mr. Courtney. Thanks, Mr. Chairman.
Secretary Gates, when he has been before the full
committee, has said over and over again that the Department is
getting eaten alive by health care costs. Mr. Khan, in your
report, you mentioned a problem that GAO identified with
TRICARE [DOD health care program] in terms of
misclassification.
And I was wondering, first of all, is that just a sort of
anecdotal, you know, sui generis incident? Or is that something
that you think is a broader based problem?
The second question is--and this is just showing my lack of
knowledge--is TRICARE done service by service, or is this a
program that is administered by the Pentagon in one place?
And given the fact that that is sort of a hot spot in terms
of the Pentagon's budget, I mean, is there efforts that are
being, you know, focused, in terms of this area, because,
again, it is something the Secretary said repeatedly to our
committee.
So, Mr. Khan, maybe you can just talk about the report that
you submitted.
Mr. Khan. Yes. I mean, that was an accounting
misclassification of information. I mean, that is one instance
that we have highlighted. There are several other instances
where--I mean, this goes down to the basic fundamentals of
bookkeeping, coding of information to make sure that it has
correct classification.
These are building blocks of financial reports. If the
information is not being accumulated and aggregated at the
correct level under the correct classifications, the
information is going to be mischaracterized in the financial
statements, so you will end up with certain types of
information to be understated and other types of information to
be overstated.
So this really points towards the importance of having that
discipline so that when you pull together the financial
statements that you have reasonable assurance that the
information that you have in front of you is accurate.
This comes to all the decisionmaking process. If you are
making important decisions, if you want to reduce certain
activity, where you want to increase activity, or where you can
have any cuts, this type of information is going to be very
useful.
Secretary Hale. TRICARE is managed centrally in the
Department. The Services, obviously, participate, but it is
managed centrally.
And, yes, it is a major problem, and we have made two broad
proposals: One, to achieve some efficiencies in the TRICARE
management agency. And they are working right now to implement
those. Can we do it with fewer contractors, fewer people to
reduce the overhead?
The other one is to make some changes in the benefits,
particularly to working age retirees.
And we have both in the military health care area. We have
made a set of proposals, and I very much appreciate the fact
that the House supported those proposals in almost all cases.
And, generally, the Senate Armed Services Committee has, too,
so I would hope that we will get authority, for example, for
modest increases in the enrollment fee for working-age retirees
in TRICARE and some changes in pharmacy co-pays.
These are tough votes. I recognize that. But some of this
is getting out of hand, and we need to begin to make some
modest changes in those benefits. So I appreciate your support.
Mr. Courtney. Well, again, I understand that certainly one
way to save money in the system is to, obviously, shift some
costs to the beneficiaries. And, again, that debate has already
taken place.
I guess the question is, though, that, you know, what I
think we would appreciate is having some confidence in knowing
that the program is being administered as efficiently as
possible, and the GAO criticism seems to suggest that there are
problems there.
And I guess that is sort of, you know, is the Pentagon
making efforts to really try and make sure before they come to
Congress, asking the beneficiaries to pay more, that, you know,
you feel good about whether or not the management is up to
speed?
Secretary Hale. We have made a whole series of efforts,
prior to proposing those beneficiary increases, to look for
ways to hold down the growth in cost.
For example, we were able to use the Veterans pricing
scheme for pharmaceuticals, which saved us--I want to say--half
a billion a year. I may correct that for the record, but it was
substantial savings.
We have looked at a variety of management improvements to
deliver the care more carefully. The miscategorization--I need
to look more carefully at the GAO report. I don't know enough
details to give the answer.
But I can tell you that before we asked for those benefit
increases, even though I think they are increases in enrollment
fees, even though I think they are fully justified, we tried to
do everything we could to try to make the system more
efficient.
Can we do more? Yes. There is an ongoing review right now
of TRICARE and the rest of the military health system, looking
for additional efficiencies. And I would hope that coming out
of that would be some further recommendations next year to the
Congress.
Mr. Conaway. Thanks, Joe.
Rob, you okay?
Mr. Andrews. Yes.
Mr. Conaway. All right.
Well, then, Bob, Beth, Asif, thank you for coming. I guess,
just in concluding here, Bob, and Beth are spectacular
professionals. You say all the right things. And to someone who
just came walking in and sat down, you would think that you
guys almost have it done, because, you know, you are really
good at telling us all these things.
As this panel progresses, diving deeper into the weeds, so
to speak, I want that sense of urgency somehow to be seen other
places, or a sense of urgency seen other places. You know Bob,
you told us last week that, you know, nobody gets up thinking
about September 30th, 2017, and that you have got to make
interim progress, incremental progress to make this happen and
a 5 for 25 on that first round on the FIAR plan.
What I don't want to see happen, though, is to set the bar
so low on those goes that you go 25/25, because you didn't push
yourselves far enough to make that happen. So there is a
balance in there. You put it too far out there, and you get
discouraged because you don't get there. You put it too low,
and you waste time as well.
So this panel is going to be committed to trying to figure
out how Congress can put that institutional continuity or
sustainability of focus in place so that over these next 6
years that we get this done. You and your predecessors are
going to be, you know, integral parts to that. So thank you for
coming this morning at 8 o'clock.
Rob, you got any closing remarks?
Mr. Andrews. Well, I just want to associate myself with the
Chairman's remarks here. We see tangible progress, and we want
to work with you to make that happen, but, frankly, the reason
this panel exists is to guarantee that progress.
We are hopeful we have a kindred spirit in Secretary
Panetta. We know we have kindred spirits on your team, but we
want to do more than spirit. We want the body as well. And the
panel is on a bipartisan basis committed to that kind of
oversight. I appreciate the opportunity to speak this morning.
Mr. Conaway. All right.
Thank you all very much.
The hearing is adjourned.
[Whereupon, at 9:03 a.m., the panel was adjourned.]
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A P P E N D I X
July 28, 2011
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DOCUMENTS SUBMITTED FOR THE RECORD
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WITNESS RESPONSES TO QUESTIONS ASKED DURING
THE HEARING
July 28, 2011
=======================================================================
RESPONSE TO QUESTION SUBMITTED BY MR. RIGELL
Secretary Hale. While the outside auditors have provided feedback
on the audits, they have not made any legislative suggestions. The
auditors' detailed observations and recommendations from the financial
statement audit of the U.S. Marine Corps (USMC) General Fund Statement
of Budgetary Resources (SBR) follow.
The audit has yielded significant improvements in key business
processes and internal controls. The Fiscal Year (FY) 2010 audit
employed a two-track approach to assessing the validity and fair
presentation of General Fund SBR in accordance with accounting
principles generally accepted in the U.S. (GAAP). Audit work streams
were segmented into two distinct categories: 1) Financial Transaction
Supportability; and 2) Information Systems Reliability.
Financial Transaction Supportability--Audit requirements are aimed
at supporting the balances reported on the financial statement by
performing examination procedures that tie the accounting transaction
to its corresponding supporting documentation. These are termed
``substantive procedures'' and assume little, if any, reliance on
internal controls.
The auditors approached testing across three key components of the
financial statement: 1) Beginning Balances; 2) Current-Year Operations;
and 3) Ending Balances and Compilation. The most difficult and
challenging component of a first-year audit is assessing the
reliability of a Beginning Balance, which represents all brought
forward balances for every appropriation that is not in cancelled
status in the year of audit. That is, appropriations that are active
for making obligation adjustments and/or disbursement for requirements
established in a prior period and remain active. The USMC financial
statement audit did not significantly progress beyond Beginning Balance
testing in FY 2010 because of the following significant auditor
observations and findings:
1. Inappropriate Accrual. The auditors uncovered
inappropriate accruals that lacked support at the time of
recognition and entry into the core accounting system. This
matter was corrected by the USMC prior to the end of the FY
2010 SBR audit.
2. Lack of Management Evidence to Substantiate Obligation
Estimates. On occasion, the USMC initiates a ``bulk''
transaction or one that is based on an estimate or calculation
for future requirements. The auditors determined that these
estimates were not being monitored or adjusted as necessary. As
a result of this audit finding, the USMC has taken steps to
implement improved estimation models and monitoring controls.
3. Inappropriate Recognition of Contract Financing Payments
as Advances. The auditors confirmed the equal general ledger
treatment of advances (pre-payments) and contract financing
payment. This represents an accounting classification error for
a specific subset of assets. Although the USMC has corrected
its core accounting system logic in order to properly record
and report contract financing payments, the impact of this
issue to the balances reflected on the financial statement was
minimal. Prior to the SBR audit, the USMC was in compliance
with the Department of Defense Financial Management Regulation
(DoDFMR) when processing the recognition of contract financing
payments. However, as a result of this audit, there are efforts
underway within the Office of the Under Secretary of Defense
(Comptroller) to update and clarify the DoDFMR.
4. Timely Recording and Review. The auditors identified a
number of documents during testing that contained abnormal
balances. These balances were a combination of negative
obligations, latent undelivered orders balances, documents
containing no recorded expenses, and stale obligations. A more
robust quarterly and year-end review is needed in order to
maintain normal balances on the documents in the core
accounting system. This includes stronger management oversight
and review of monthly reporting. The USMC has strengthened the
tri-annual review process that is required throughout the DoD.
5. Trial Balance Compilation. The compilation and
reconciliation of the detailed transactions to the financial
statements is the first and most important requirement of any
audit. The USMC was able, although with some difficulty and
delay, to reconcile the detailed financial transactions to the
unadjusted trail balance that the auditors use to sample and
test the balances of the SBR. In order to sustain these
improvements, the USMC implemented a series of reports that are
generated monthly to facilitate faster and more accurate data
exchange to the auditors. Additionally, the USMC worked closely
with the Defense Finance and Accounting Service (DFAS) and the
Business Transformation Agency to create a complete general
ledger reconciliation of the unadjusted trial balance to the
adjusted trial balance. This was an achievement never
accomplished prior to the audit that spurred improved financial
reporting and reconciliation support that will yield tangible
audit benefits all financial statement reporting entities
within the DoD.
6. Shared Appropriations. Shared appropriations are
appropriations identified and authorized through the Department
of the Navy (DON) annual budget process that are shared by the
Navy and the USMC. The auditors uncovered the inappropriate use
of a general ledger account that does not reflect an allotment
from the DON. For the FY 2011 General Fund SBR audit, the USMC
implemented general ledger corrections to effect a
reclassification across the impacted general ledger accounts to
support the appropriate recording and reporting of a shared
appropriation. There is no net effect to the presentation of
the financial statement and the balances reported. These
corrections are currently under evaluation.
Information Systems Reliability--The audit requirements focus on
leveraging the Government Accountability Office Federal Information
System Controls Audit Manual in the auditor's approach for testing
financial systems and mixed-use systems controls. The controls tested
consisted of select internal controls that depend on information
systems processing and included general controls and application
controls.
The FY 2010 audit focused on three systems: 1) the Marine Corps
Total Force System (MCTFS); 2) the Standard Accounting Budgeting and
Reporting System (SABRS); and 3) the Defense Departmental Reporting
System (DDRS). Of the three systems, only one system, MCTFS, is owned
by the USMC. MCTFS supports integrated personnel and pay transactions
for both the active and reserve components of the USMC as well as
retired Marines. SABRS, which is owned by DFAS, is the core accounting
systems used by the USMC for all General Funds appropriations. DDRS is
used by the USMC to produce DoD financial statements, interim financial
statements and budgetary reports. For FY 2011, the auditors added the
Defense Cash Accountability System (DCAS) to their information systems
audit scope. Along with DDRS, audit assessment of DCAS represents
significant value for the DoD as this is a key financial recording and
reporting system that is utilized across the enterprise.
The FY 2010 audit of the USMC SBR identified 56 information systems
(IS) audit findings for the 3 systems. Examples of the auditor's
observations and findings, as categorized by application control,
include:
1. Security Management. These controls provide reasonable
assurance that security management is effective. The auditors
identified instances where application level logging and
monitoring was not performed and formal policy and procedures
for the monitoring performed by third party providers had not
been documented. By not actively monitoring application level
activity nor third party providers adherence to service level
agreements or other performance metrics, management cannot
ensure they are receiving the agreed upon services at agreed
upon metrics. There is also the risk that the third party
provider does not properly communicate any security
vulnerability to management in a timely manner. This could
impact the SBR if unauthorized, fraudulent, or erroneous
application activity is not detected, logged, and investigated
by the third-party information technology (IT) security
organization.
2. Access Controls. These controls provide reasonable
assurance that access to computer resources (data, equipment,
and facilities) is reasonable and restricted to authorized
individuals. The audit revealed that periodic management review
of user access was not performed. Without periodic reviews and
recertification of users, inappropriate access to significant
financial data may be undetected. Additionally, there is risk
of lingering access for employees who have been reassigned,
terminated, or retired.
3. Configuration Management. These controls provide
reasonable assurance that changes to information system
resources are authorized and systems are configured and
operated securely and as intended. The audit revealed little
evidence of periodic review of changes that were migrated into
production. Without a periodic review of changes that are
migrated to production, there is an increased risk that an
unauthorized, erroneous, or harmful code could be introduced
the production environment and negatively impact the SBR
financial statement reporting systems and related processes.
4. Segregation of Duties. These controls provide reasonable
assurance that incompatible duties are effectively segregated.
The auditors uncovered instances where administrators were
granted a functional role for their administrator accounts
without an approved waiver from management. By not effectively
restricting access to applications based on job function and
adhering to segregation of duties principles, the risks for
fraud and inappropriate transactions are increased.
5. Contingency Planning. These controls provide reasonable
assurance that contingency planning: 1) protects information
resources and minimizes the risk of unplanned interruptions;
and 2) provides for recovery of critical operations should
interruptions occur. The contingency plan was not approved or
tested, and did not include a business impact analysis. By not
having a tested contingency plan and business impact analysis,
there is an increased risk that the USMC will not be able to
restore a system quickly and effectively after a service
disruption.
6. Business Process. These controls are the automated and/or
manual controls applied to business transaction flows. They
relate to the completeness, accuracy, validity and
confidentiality of transactions and data during application
processing. They typically cover the structure, policies, and
procedures that operate at a detailed business process level
and operate over individual transactions or activities across
business processes. The auditors found that a data management
strategy and design (i.e., how data is organized into
structures to facilitate retrieval while minimizing redundancy)
was not formally documented. Additionally, there was no formal
procedure that documented how data was managed and monitored. A
data management strategy and design is a critical factor in
helping to assure the quality of data as well as its
interrelationship with other data elements. Without a data
management strategy and design there is a risk of poor quality
data that may lead to a failure of system controls, process
inefficiencies, and inaccurate management reporting.
7. Interface Controls. These consist of those controls over
the: 1) timely, accurate, and complete processing of
information between applications and other feeder and receiving
systems on an on-going basis; and 2) complete and accurate
migration of clean data during conversion. Documentation that
identified, listed, and provided an explanation for interface
data processing files was not readily available for the
auditors. Without properly listing, identifying, and providing
an explanation for all the edit conditions contained in the
input process program, there is no evidence that the edit
checks are appropriately configured for data processing.
8. Data Management System Controls. Enforce user
authentication/authorization, availability of system
privileges, data access privileges, application processing
hosted within the data management systems, and segregation of
duties. The audit testing found that multiple users shared one
administrative account and password to access the Collection
Server and could invoke privileged level access. Allowing the
use of a shared account decreases the ability for management to
establish accountability for user actions. Additionally, the
use of a guest account with administrative privileges compounds
the potential effect by having a generic account that could
potentially be used to modify system settings or data without
the action being tied to an individual.
The audit helped to identify areas of both financial and IS risk in
the USMC. The USMC audit team has worked with the auditors to
understand the issues and risks and has taken firm action to remediate
the known findings. The corrective actions resulting from the findings
and issues identified in the FY 2010 audit are currently being
reevaluated by the auditors during the FY 2011 audit. At this time the
FY 2011 audit is not complete. The USMC is confident that its action to
address these audit issues and findings in FY 2011 will be sustained
and ultimately validated by an audit opinion. Additionally, the USMC
will continue to strengthen its management controls and improve its IT
security posture in response to any future audit findings. [See page
16.]
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QUESTIONS SUBMITTED BY MEMBERS POST HEARING
July 28, 2011
=======================================================================
QUESTIONS SUBMITTED BY MR. PALAZZO
Mr. Palazzo. On Page 7, under the heading ``Where We Are Today,''
you stated that you are ``assembling teams within each Military
Department that will be tasked with improving financial controls.'' I
applaud your efforts to assemble these important teams within the
Services. Can you please elaborate, for the Panel, the makeup of these
teams with respect to their accounting background? How many of them are
working on this task daily, etc?
Secretary Hale and Ms. McGrath. Congressman Palazzo let me start by
thanking you for your comment in support of our plan to assemble teams
to improve financial controls. Our plan calls for each Military
Department to devote at least 15 people from its audit agency to assist
the Department to improve its internal controls. Auditors have the
experience needed to assist business and financial process owners with
designing sound internal controls and then assisting with their
effective implementation. As for the accounting background of the
teams, the employment requirements for auditors include at least 24
hours of accounting or auditing course work and many of the auditors
have years of financial audit experience.
Mr. Palazzo. On Page 5 of your submitted statement, you mention
that the ``Deputy Secretary has made clear that one of his highest
management priorities is improving the acquisition, development, and
fielding of IT systems.'' While I can appreciate the attention and
urgency given to acquiring, developing, and getting IT systems into the
field, could DOD utilize systems they already have, instead of going
through rounds of acquisitions to purchase something we could find in a
desk
drawer?
Secretary Hale and Ms. McGrath. The Department is committed to
taking a balanced approach to transitioning from its legacy systems
environment to its target systems environment. This balanced approach
includes both the acquisition of new systems and the modernization or
retirement of existing systems. In many cases, utilization of existing
systems to meet current capability needs is not possible, however, due
to outdated programming languages, non-compliance with statute such as
the Federal Financial Management Improvement Act (FFMIA), stovepiped
business processes, or a variety of other reasons. In those cases, it
is critical that the Department efficiently and effectively acquire new
business systems that help to integrate our business operations and
deliver interoperable data.
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