[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]
[H.A.S.C. No. 112-68]
DOD'S EFFORTS TO IMPROVE
PAYMENT AND FUNDS CONTROL
__________
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
SEPTEMBER 22, 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
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CHRONOLOGICAL LIST OF HEARINGS
2011
Page
Hearing:
Thursday, September 22, 2011, DOD's Efforts To Improve Payment
and Funds Control.............................................. 1
Appendix:
Thursday, September 22, 2011..................................... 23
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THURSDAY, SEPTEMBER 22, 2011
DOD'S EFFORTS TO IMPROVE PAYMENT AND FUNDS CONTROL
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
Blair, Daniel, Deputy Inspector General for Auditing, U.S.
Department of Defense.......................................... 6
Easton, Mark, Deputy Chief Financial Officer, U.S. Department of
Defense........................................................ 3
Khan, Asif A., Director, Financial Management and Assurance, U.S.
Government Accountability Office............................... 8
APPENDIX
Prepared Statements:
Blair, Daniel................................................ 40
Conaway, Hon. K. Michael..................................... 27
Easton, Mark................................................. 29
Khan, Asif A................................................. 61
Documents Submitted for the Record:
[There were no Documents submitted.]
Witness Responses to Questions Asked During the Hearing:
Mr. Andrews.................................................. 97
Mr. Conaway.................................................. 97
Questions Submitted by Members Post Hearing:
[There were no Questions submitted post hearing.]
DOD'S EFFORTS TO IMPROVE PAYMENT AND FUNDS CONTROL
----------
House of Representatives,
Committee on Armed Services,
Panel on Defense Financial Management and Auditability
Reform,
Washington, DC, Thursday, September 22, 2011.
The panel met, pursuant to call, at 8:01 a.m. in room 2212,
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. Call the meeting to order. Welcome to today's
hearing on DOD's [Department of Defense] efforts to improve
payment and funds control. Previous hearings have covered DOD's
efforts to improve financial management, achieve audit
readiness.
Improving financial management controls is critical to
safeguarding taxpayer dollars and preventing waste, fraud, and
abuse. Today we will examine the Department's efforts to
address improper payments, Antideficiency Act violations, and
other types of disbursements that increase the risk of
fraudulent or erroneous payments and impact the ability to
report reliable information on our financial statements.
Billions of taxpayer dollars are wasted each year when the
Federal Government makes payments in incorrect amounts to the
wrong entities and to entities that are not eligible to receive
those payments. In fiscal year 2010, the Federal agencies
reported an estimated $125 billion in improper payments, of
which a billion was reported by Department of Defense. Under
any other circumstance, a billion would be considered a
staggering amount. Yet both the DOD Office of Inspector General
and GAO [Government Accountability Office] have reported that
DOD may not be reporting or capturing the full extent of its
improper payments.
Properly identifying and reporting the amount of the
improper payments is a critical step on the way to developing
actions needed to prevent and recover these payments. The
Antideficiency Act prohibits executive agencies from incurring
obligations or making expenditures that exceed their
appropriations. That is one of the major laws--major ways in
which Congress exercises its constitutional control of the
purse.
In September 2008, GAO reported that as a result of
continuing financial management weaknesses, including
difficulties in ensuring the proper authorization, processing
and recording of payments, DOD's ability to timely and reliably
determine the amounts of funds that it has available to spend
is impaired, and the Department remains at risk of
overobligating and overspending its appropriations in
violations of the Antideficiency Act. In fact, according to
DOD--sorry, GAO, DOD reported 64 ADA [Antideficiency Act]
violations from fiscal year 2007 through mid-September 2011,
totaling about $927 million.
DOD has taken actions to improve its financial management
system, yet as illustrated by the examples--certain examples,
there is still much work to be done. With budget deficits in
the trillions, the Government can ill afford to not properly
account for all of our taxpayer resources because of poor
management controls.
I want to thank our witnesses in advance for their
testimony. We have today Mark Easton, Deputy Chief Financial
Officer for the Department of Defense; we have got Daniel
Blair, Deputy Inspector General for auditing, Department of
Defense; and Asif Khan, Director of Financial Management and
Assurance from GAO.
Now I will turn to Rob Andrews for any comments he wants to
make.
[The prepared statement of Mr. Conaway can be found in the
Appendix on page 27.]
STATEMENT OF HON. ROBERT ANDREWS, A REPRESENTATIVE FROM NEW
JERSEY, RANKING MEMBER, PANEL ON DEFENSE FINANCIAL MANAGEMENT
AND AUDITABILITY REFORM
Mr. Andrews. Chairman, good morning. I would like to thank
you and our colleagues for assembling a really first-rate
panel.
We have heard from all three of these gentlemen in various
iterations over the last couple years, and I look forward to
this morning's testimony.
I think the chairman set the context exactly right for this
discussion. If you exclude the OCO [Overseas Contingency
Operations] accounts, the overseas accounts in Iraq and
Afghanistan, and you look at real dollar defense budgets, the
defense budget is 40 percent higher than it was in 2001 in real
dollars. We have essentially the same end strength, the same
number of ships, the same number of airplanes, which sort of
begs the question, where is this money, and what have we gotten
for it?
Now, I don't think there is a preordained right answer to
what the level should be. Actually, the best answer I have ever
heard was given by then-Marine Commandant General Krulak a few
years ago before the committee when someone asked him what he
would do with the last dollar he had to spend. And he said, I
would spend it on, after he or she has completed their mission
successfully, bringing my last Marine home safely. Pretty good
answer, I thought.
So, with that spirit in mind, in looking at this 40 percent
real growth over time, we have a lot of important decisions to
make. We can't make good decisions without accurate data. And
we can't have accurate data without auditable financial
statements.
The chairman talked about the alarming level of
inappropriate payments. When I say ``inappropriate,'' I don't
mean necessarily criminal or nefarious, but, you know, paying
too much for the right thing or paying something for the wrong
thing. And so I think we have assembled--I know we have
assembled--three individuals that have great expertise in
addressing this problem and pointing us in the right direction.
And Mr. Chairman, I am looking forward to hearing what they
have to say and then engaging with our colleagues in some good
questions to further edify the effort.
So, good morning, and I look forward to hearing what you
have to say.
Mr. Conaway. Thanks, Rob.
One quick anecdote. I was on a trip last week out in the
hither lands at a DOD facility. We finished the tour, and a
couple of the guys who were leading the tour were walking, the
three of us were walking off, and they were having a brief
conversation. And I wasn't paying much attention, but the
phrase ``ERP'' [Enterprise Resource Planning] came into their
conversation. This is between those two. So I kind of stepped
into it.
I said, what are you guys talking about? And they were
talking about they were going to, over the next 3 or 4 weeks,
they were going to have to put in an extensive amount of work
to get converted to whatever the ERP thing they were working
on.
I said, well, what do you think about that? They were very
complimentary. They had no reason to know why I had a keen
interest in it. They said, you know, it is going to be better
on the other side. It will help us work our work better.
So, Mark, pass on to the rest of the squad, it is filtering
all the way down to buy-in by folks who are actually having to,
at the point end of that sword, to have to put it together. So
I was very encouraged by their comments that they were sold out
to the advantages of getting it done in their particular deal.
So, with that, Mark, you want to start us this morning?
STATEMENT OF MARK EASTON, DEPUTY CHIEF FINANCIAL OFFICER, U.S.
DEPARTMENT OF DEFENSE
Mr. Easton. Thank you, sir.
Chairman Conaway, Ranking Member Andrews, members of the
panel, thank you for your continued interest in DOD financial
management and for providing me an opportunity to relate it to
issues like improper payments, problem disbursements, and
Antideficiency Act violations.
I submitted a more detailed statement for the record, but
in the interest of time, I will summarize briefly so that we
will have as much time as possible for questions.
As the deputy chief financial officer, my responsibilities
at DOD involve financial policies, systems compliance, and
internal controls, among a lot of other things. I have dealt
with these kinds of things in various capacities in the field,
both in uniform and as a civil servant and in the field
particularly. So I appreciate your comments relative to getting
the word out.
I am proud to be part of a financial management workforce
that is supporting the warfighter around the world. But I am
also mindful of our stewardship responsibility and the fact
that DOD financial management has remained on the GAO high-risk
list since 1995.
My experience tells me that a reasonable level of controls
do exist within DOD, especially in the local control of assets
and expenditure of funds. But my current position also provides
me with a broader perspective that must acknowledge enterprise-
wide weaknesses that negatively impact our financial management
capabilities and demand an enterprise-wide response. The lack
of auditable financial statements are clearly a symptom of
those weaknesses.
As we have talked to you many times in this forum, DOD has
a challenging business environment, a combination of size,
complexity, and geographical dispersion. How well we manage
within that environment depends on how well the people,
processes, and systems that have to deal with that interact and
work together.
People are really the key, particularly now. We have a
dedicated and experienced workforce, and we rely heavily on
those traits of dedication and technical expertise. We depend
on them not only to support today's mission, which has been
expanding over the last 10 years particularly, and to deal with
today's problems, but also to be able to acquire new skills and
to lead change throughout the enterprise.
Another key business element is processes. And this is an
area that I think you are going to hear a lot of issues across
the board. But the one thing that we do agree on is the need
for increased and improved internal controls, more standard
processes. That is the key to being able to produce higher
quality financial information for both reporting and
decisionmaking.
And the third factor, Mr. Chairman, is the one you
mentioned about ERPs. Clearly, our size and complexity demands
that we have automated, integrated systems. It is key to
particularly being able for us to support auditability and
sustain those changes. The bottom line is that a stronger
business environment is really the key. It will reduce the
likelihood of improper payments and problem disbursements that
we have experienced and minimize the risk of ADA violations.
I would assert that we manage these three risk factors
well, despite current weaknesses, but we have to do much, much
better. Let me highlight each of these areas very briefly.
First, improper payments. The Defense Finance and
Accounting Service--and you heard from Martha Smith last week--
handles about 90 percent of all our payments. We use post-base
statistical sampling on five of the six major programs that we
have. And we plan to expand--and this is an area of
contention--but we plan to expand that to our commercial
payment area, post-payment statistical sampling, in addition to
being able to act on issues that we receive in terms of
notifications from vendors to be able to recapture those--
capture those resources.
We use the processes to be able to identify root causes and
act on those causes. As you mentioned, the Government-wide
error rate with the $120 billion that are reported of improper
payments, you know, we represent roughly half of that as a
percentage, and about $1 billion. The elements that we are
emphasizing through auditability, and this is the linkage that
I will keep am coming back to, strong internal controls will
further reinforce this program.
Turning to problem disbursements, and to try to use a plain
English analogy, we have thousands of people writing checks and
thousands of individual accounts. One digit or one problem on
any one of those transactions oftentimes doesn't prevent that
payment from being disbursed, but it does prevent it from being
able to return and being posted to your checking account. We
put problem disbursement--essentially, that is what a problem
disbursement is--we put problem disbursements into three
categories: unmatched, which is a case that we have an
obligation, and that disbursement cannot find its way back to
that obligation, so we have an unmatched condition. The second
is something we call a negative unliquidated obligation, which
means it did find that original obligation, but the dollar
value exceeded that. And then the third, you might refer to it
as float in your own checking account, where you have written
checks, we call that in-transits. Once those in-transits reach
a particular age, they essentially fall into the categories of
problem disbursements.
Across the board, we have made significant progress. For
example, in 1999, overage problem disbursements since then have
been reduced by 82 percent; negative unliquidated obligations
have been reduced by 97 percent.
Antideficiency Act violations are another matter. They can
occur for a number of reasons: a violation of purpose, time, or
amount. We first strive to prevent the occurrences. And as you
heard Secretary Hale say, the only right goal for
Antideficiency Act violations is zero. But when they do occur,
we need to track them, track the ongoing investigation, and
make sure that we reach a conclusion and report promptly. Each
ADA case is unique, but there are recurring themes. And
frequently, they reveal a need to increase the level of
training and awareness, because it is a very, very complex
business environment.
Over the past 4 years, a total of 123 cases were identified
through audits or through self-reporting, and we would like do
more through self-reporting, having management assume that
responsibility; 48 cases were investigated and found to be
actual violations and were reported; 37 cases were investigated
and found to be no violations; and 38 are currently under
investigation as potential violations. It is important to note
that it is not--once we begin an investigation, we may reach
the conclusion that it is not a violation in the course of the
investigation. We have been able to minimize, and the number of
Antideficiency Act violations have been relatively stable
despite a very, very porous business environment.
Our current emphasis on internal controls as part of our
audit readiness program should contribute to timelier
investigation--excuse me, timelier identification, that is
really the key, and more efficient investigation of those
cases. Secretary Hale has placed significant emphasis on
ensuring that we are reporting in a more timely manner. We
inherited approximately--we have reduced the number of overage
cases--these are cases that are too old, past the 1 year time
frame to investigate and report--we have reduced that number by
60 percent.
In summary, please be assured that my colleagues and I are
fully committed to fulfilling our stewardship responsibility to
the taxpayer. We recognize the benefits of a stronger and
better controlled business environment. One that supports
auditable financial statements will increase public confidence
in our reporting and will reduce the incidents of improper
payments and problem disbursements. Most importantly, they will
provide better information for us to get more out of the
program.
We are building a business environment, those people,
processes, and systems, that will attack the causes, not just
the symptoms. And finally, we are maintaining a strong working
relationship with key stakeholders, to include my colleagues on
the panel today, GAO and DOD IG [DOD Office of Inspector
General]. Their feedback, while sometimes painful, is important
to our overall efforts to strengthen financial management.
Mr. Chairman, this concludes my statement, and I sincerely
appreciate the time that you and your distinguished panel have
invested to better understand our challenges and support our
efforts to address them.
[The prepared statement of Mr. Easton can be found in the
Appendix on page 29.]
Mr. Conaway. Thanks, Mark. Daniel.
STATEMENT OF DANIEL BLAIR, DEPUTY INSPECTOR GENERAL FOR
AUDITING, U.S. DEPARTMENT OF DEFENSE
Mr. Blair. Chairman Conaway, Ranking Member Andrews, and
distinguished members of the panel, good morning, and thank you
for the opportunity to appear here before you on behalf of the
DOD IG to talk about improper payments, Antideficiency Act
violations, and other problem disbursements.
In the current economic environment, it is important for
DOD to know that every payment that it makes goes to the right
person for the right amount and at the right time. Over the
past few years, the Department has worked hard to address its
financial management challenges and has recognized some of the
impediments that need to be resolved. However, more progress
needs to be made in order to be good stewards of the taxpayers'
money.
Since fiscal year 2007, DOD IG has issued 27 audit reports
addressing improper payments. These payments are often the
result of unreliable data and poor internal controls, and they
create an environment where fraud and waste are more likely.
In fiscal year 2010, the Department reported nearly $1
billion of estimated improper payments. However, we found the
Department's process did not review more than half of the
fiscal year 2010 gross outlays and therefore question the
reliability of this estimate.
Without strong internal controls, the Department is at risk
of making improper payments. For example, our audit of a
contract supporting Broad Area Maritime Surveillance found that
DOD personnel did not validate that a contractor was entitled
to receive over $329 million because none of the invoices were
reviewed. We also found that the Navy paid this contractor
$206,000 for questionable travel expenses, such as a golf
outing and air shows in Paris and Singapore.
We have concerns about the large number of potential
Antideficiency Act, or ADA, violations that are averted because
we identify them during the course of our audit, and the
Department takes appropriate corrective actions to remedy these
situations. Since 2005, we have issued 49 reports that have
identified over 900 potential ADA violations, valued at over
$2.3 billion, which the Department needed to investigate and
resolve.
We found that the Department often sends money to other
Federal agencies to fulfill contracting needs. And this money
may be used beyond the time and purpose limitations of the
appropriation. A joint audit that we did with the State
Department IG recently on the Afghan National Police Training
efforts identified almost $75 million in potential ADA
violations. Using Defense Department funds, the State
Department re-obligated funds outside the scope of the
reimbursable agreement and moved expired funds to cover new
requirements.
Fund Balance with Treasury reconciliations are a basic
control to ensure that all disbursements are properly accounted
for, and they help to identify problem disbursements. As you
know, generally Fund Balance with Treasury is similar to a
checking account that needs to be reconciled on a regular
basis. However, the Department oftentimes struggles to
consistently reconcile these accounts, which last year totaled
over $521 billion.
Currently, 54 other defense organizations share a
commingled Fund Balance with Treasury account and must rely
primarily on balances in the Cash Management Report when
reconciling to the U.S. Treasury. However, we recently found
that the cumulative balances on the Cash Management Report were
over $9 billion different than amounts reported by the U.S.
Treasury and included $1.45 billion in unmatched transactions.
During fiscal year 2010, the Marine Corps' financial
statement audit of its Budgetary Resources, Statement of
Budgetary Resources, the Marine Corps was unable to support its
Fund Balance with Treasury reconciliations. However, starting
in June of this year, the Marine Corps has been able to provide
detailed transaction files supporting its reconciliation
process. So there is an obvious note of improvement that has
taken place since the last year's audit.
Before closing, I also want to briefly mention three key
challenges that must be addressed before the Department's
financial statements become auditable by the 2017 deadline.
These three areas are improving data reliability, improving
internal controls, and effectively implementing new systems.
These challenges must be resolved before this ambitious plan
can become a reality.
We frequently identify financial data that is incomplete
and inaccurate. And as a result, DOD decisionmakers and other
leaders cannot rely on this data to make sound business
decisions. The Department also faces pervasive internal control
weaknesses that hamper its financial management efforts. While
DOD's new systems are a key component of its auditability
strategy, unless the Department first improves the quality of
the data and reengineers its processes, many of the intended
benefits of these systems will not be realized.
In closing, sound financial management is critical to
providing effective stewardship over billions of dollars the
Defense Department receives annually. While I recognize that
there is significant effort that the DOD leadership is putting
in at this point to resolve financial management problems,
frankly, much more remains to be done. Senior leadership in the
Department and other stakeholders, including Congress, need
reliable financial information on a daily basis to ensure that
every dollar supports the warfighter and improves military
readiness.
This concludes my statement, and I would be happy to answer
any questions that you may have.
[The prepared statement of Mr. Blair can be found in the
Appendix on page 40.]
Mr. Conaway. Thank you, Daniel.
Asif.
STATEMENT OF ASIF A. KHAN, DIRECTOR, FINANCIAL MANAGEMENT AND
ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Khan. Mr. Chairman, Ranking Member Andrews, and members
of the panel, good morning.
It is my pleasure to be here today to provide our
perspectives on the status of Department of Defense funds
control and payment controls.
As a steward of public resources, DOD is responsible and
accountable for using public funds for the purposes and within
the timeframes and amounts prescribed by law, making payments
to the right parties in the correct amount, identifying and
recouping any improper payments, and accurately recording and
reporting on its transactions on the use of public funds.
I would like to thank the panel for holding this important
hearing. Having assurance that these basic controls and
processes are working correctly is a fundamental prerequisite
for overall financial reliability and reporting. In my
testimony today, I will discuss the weaknesses in DOD's funds
control and payment controls and their impact on the
reliability of DOD financial information. I will also discuss
the Department's efforts to estimate its improper payments. My
statement today is based primarily on our prior work. In
addition, it includes relevant information from reports issued
by the DOD Inspector General.
First, regarding funds control, for years GAO has reported
pervasive weaknesses in DOD's controls over its funds and the
reliability of its financial reporting. For example, in 2008,
like you had mentioned, Mr. Conaway, we had reported that DOD's
complex and inefficient payment processes, unintegrated
business systems, and weak internal controls impaired its
ability to maintain proper funds controls, putting DOD at risk
of overobligating or overspending its appropriations. These
conditions have hindered its ability to ensure that
transactions are accurately recorded, sufficiently supported,
properly executed, and effectively monitored. In other words,
at any given time, DOD does not have sufficient reliable
information available to provide assurance that its obligations
and disbursements are within budget and legal limits.
Funds control weaknesses place DOD at risk of violating the
Antideficiency Act, enacted to prevent agencies from incurring
obligations or making expenditures in excess or in advance of
appropriations. The ADA requires DOD to report on its ADA
violations. For the 5-year time period from fiscal year 2007
through September 15, 2011, DOD reported 64 ADA violations,
with a total dollar amount of just over $927 million. However,
DOD's reporting of ADA violations may not be complete as a
result of other pervasive internal control weaknesses.
In addition, DOD has a category of disbursement it refers
to as problem disbursements. They include disbursements paid
that have not been matched to their related obligation records
as a result of breakdowns in both fund control and payment
controls. DOD has been reporting hundreds and millions of
dollars in unmatched disbursements over 120 days old in recent
fiscal years.
Problem disbursements increase the risk of making
fraudulent or erroneous payments without detection. In
addition, problem disbursements impair the reliability of DOD
financial statements and DOD's ability to control its
disbursements, a key aspect of funds control.
These and other weaknesses over financial reporting have
prevented the military services, and DOD overall, from
preparing a reliable Statement of Budgetary Resources, the SBR,
since they were first required in 1998. For instance, like Mr.
Blair mentioned, the Marine Corps received a disclaimer of
opinion on its fiscal year 2010 SBR due to serious control
weaknesses. Also, funds control and other weaknesses are
currently hindering Navy's audit readiness related to its Funds
Balance with Treasury. Controls over Fund Balance with Treasury
are similar to reconciling a checkbook with a bank statement
and a key step in preparing the SBR.
Finally, regarding improper payments, DOD reported for
fiscal year 2010 that it made an estimated $1 billion in
improper payments. However, these estimates do not include
amounts from its commercial payment programs, which account for
approximately one-third of the value of DOD payments. Our prior
work and reports issued by the DOD IG have highlighted the
Department's longstanding and significant problems with
estimating and preventing improper payments.
Specific weaknesses in DOD's payment controls include
inadequate payment processing, inadequate support documentation
for expenditures, financial systems deficiencies, and also weak
contract audit and payment controls. We have also reported on
weaknesses in DOD processes for assessing the risk of improper
payments and in reporting estimated amounts of improper
payments.
In closing, Mr. Chairman, DOD continues to face difficult
challenges. If DOD is to achieve its stated goal of audit
readiness for its consolidated financial statement by the end
of fiscal year 2017, it is critical for the Department to
closely monitor its progress. It is also critically important
for DOD to focus on the basics, such as correctly recording
obligations, performing key reconciliations, and making
accurate payments.
Mr. Chairman, Ranking Member Andrews, and members of this
panel, this concludes my prepared statement. I would be happy
to answer any questions that you may have at this time. Thank
you.
[The prepared statement of Mr. Khan can be found in the
Appendix on page 61.]
Mr. Conaway. All right.
Thank you, gentlemen.
We are going to reverse order on our side.
Todd for 5 minutes.
Mr. Young. Thank you, Mr. Chairman.
Thank you to all of our witnesses for your service and
appearance here this morning. I wanted to direct my line of
inquiry to ERP implementation, something all of you touched on
at various levels of detail.
DOD we know is investing billions of dollars in modernizing
these business systems. And there have been some challenges,
understandably at some level in terms of implementing these
systems in a timely fashion and within budget. It was Mr.
Blair, I believe, in his testimony, who said that DOD has been
unable to meet key milestones for 4 of the 11 ERP systems in
the Department.
So I am curious what impact you project that any continued
slippages will have in terms of the Department's efforts to
improve its funds control and payment processes, firstly. And
then, secondarily, what, if anything, is being done and can be
done to mitigate those slippages in your interface with the
vendors or internally?
Mr. Blair. One of the things that is important to note is
how critical the ERP systems are to the Department's fund
balance--or not just fund balance, but to auditability of all
of its statement. And as you noted, some of them have slipped.
And I think that because it is such an integral part of the
auditability efforts, this slippage is of serious concern. It
could have a profound impact upon whether or not the Department
is able to meet its auditability goal.
What we have done at the IG is to increase the number of
audits that we are doing of these systems, because what we are
starting to see is that there are some consistent themes in LMP
[Logistics Modernization Program], for example, or GFEBS
[General Fund Enterprise Business System], where some of the
same problems exist in those systems, where they are not
compliant with the standard general ledger, for example. And we
are making recommendations to the Department to fix these, but
also to look at how they are implementing other ERPs so they
can take the lessons learned from one and apply it to all, as
appropriate.
Mr. Young. Thank you.
Mr. Easton.
Mr. Easton. We appreciate the question. I think that with I
would say most the of the ERPs--we have still got a couple of
ERPs from Air Force coming along--but most of the ERPs we are
beginning to more effectively apply lessons learned. And I
would look for some of the slippages in schedule to be
mitigated, if only for the fact that we are very close to the
end of the program in many regards. We are directly linking
those things to audit readiness.
I would venture to say that some of our previous experience
and some of the cause is the fact that we had the acquisition
program delivering a system without the business community
fully engaged and being able to link the kinds of things that
we talked about. So I think that we have done a much better job
of being able to say, you know, these are the problems that we
are trying to solve relative to problem disbursements.
Having said that, we are putting these ERPs into an
environment that is sort of flawed. And so the interfaces that
exist now, hopefully many of them will go away, we will begin
to improve that process as well. So bottom line is that we are
getting better, but it is a critical enabler.
Mr. Young. You share that assessment, Mr. Khan?
Mr. Khan. Mr. Young, I just want to mention two things as
far as the ERP slippage is concerned. The impact is going to be
more cost, obviously, because there are cost overruns. And it
is going to require more money in terms of using legacy
systems. And the impact of using legacy systems on a go-forward
basis is going to be on improper payments and ADA violations,
because the underlying cause is weak controls. If we continue
forward with the legacy systems, it is going to perpetuate the
weak controls, causing more improper payments or continuing to
have them and also ADA violations as the status quo.
Mr. Young. So to take that to the next level, you say if we
continue on with the legacy systems, it would require
additional appropriations by Congress, additional investments
to move past some of those systems, right? Otherwise we can
experience additional data exchange challenges and corrupt data
and what not, right? So we are just going to have to weigh that
trade-off.
Mr. Khan. I mean, that is a correct consequence that you
have laid out.
Mr. Young. Okay.
Mr. Khan. It is going to cost more to maintain the legacy
systems, certainly, and operate them. And at the same time,
additional money is going to be spent on developing the ERPs.
Mr. Young. Thank you all.
I yield back.
Mr. Conaway. Thanks, Todd.
Rob, 5 minutes, or Joe.
Mr. Andrews. Recognize Mr. Courtney.
Mr. Conaway. In spite of rewarding bad behavior, we will go
with Joe Courtney.
Mr. Courtney. Thank you, Mr. Chairman.
Over the weekend, I was at an Indian event, the Mohegan
Indian event, where they gave me a new name. It was Two Iron
Fish instead of Two Subs, which Mr. Conaway would appreciate
that. Mr. Blair, your testimony you talked about the 27 audits
that have taken place since 2007. What triggers those? Is that
just sort of random, or is it whistleblower complaints, or is
it a regular process? I mean, what--maybe you could just help
me with that.
Mr. Blair. Our audits start from a wide variety of sources.
Some of them are whistleblowers. Some are as a result of our
annual planning efforts. Some of them are as of a result of
outreach to the Department, and we ask them, what are your
areas of concern? So we put that all together; we do our annual
audit plan. And so that is how we come up with the wide variety
of the audits that we do.
Mr. Courtney. So if we fast-forward to 2017 and we get to a
place where it is auditable systems, what does that mean for
your office? Does that allow you to be less random in terms of
trying to find where the problems are?
Mr. Blair. There is no doubt that when we get to the 2017
date that we are going to have to approach this with a large
number of our resources. And it will reduce the number of
audits that we can do in other areas. I do have a fairly large
number of staff who are financial statement auditors. And they
will be the ones that will be leading the 2017 effort. But it
will impact some of the other work that we have been able to
do. But what I am hoping is that as we go forward over the next
several years, there will be more and more corrections that
will be made, less audits are needed in those other areas, so
that we will be able focus those resources appropriately on
this effort.
Mr. Courtney. So when you, on page three of your testimony,
talked about we found the Department's review process included
less than half of fiscal 2010's first quarter gross outlays, I
mean, help me. I read that as saying that basically we don't
know about where the other half is in terms of accuracy as far
as payments. And will that change once we get to 2017,
assuming, you know, we hit that date?
Mr. Blair. Mr. Easton and I were talking about that before
we started this morning. And one of the things that we agree on
is the need to expand the methodology that they are using to
identify improper payments and to go into those other gross
outlays in subsequent years that they didn't look at in fiscal
year 2010. And the more you look, the more you are going to
find. The more you find, the more corrections that can be made
to prevent that going forward. So I think that is the ultimate
goal.
Mr. Courtney. Go ahead, Mr. Easton.
Mr. Easton. Can I follow up? On that particular issue, I
guess going back to your broad question in 2017, I would like
to see an environment where management assumes responsibility
for those internal controls. I would like to be able to go to
Dan and say, you know, you are going to have to put your
resources in a financial audit. That will mean because we have
recognized and acknowledged and implemented controls so that
you don't have to make these specific kind of things. On that
particular issue of improper payments, and this was an issue
that, quite frankly, we did not agree with the segment of
outlays that was in the testimony were intergovernmental
outlays, essentially, and some in the intelligence community
that were not included, and we did not plan to include those.
And so there was a difference of opinion there. There is much
that we agree on, and that particular area that we did not
agree.
But an audit will allow us to be able to combine the
internal control perspective, the coverage perspective, so that
we don't have these disagreements in the future.
Mr. Courtney. Thank you.
I yield back, Mr. Chairman.
Mr. Conaway. Thank you.
Scott.
Mr. Rigell. Thank you, Mr. Chairman.
I appreciate the panel coming in this morning. Having been
in the business for about 25 years, I have certainly been
embarrassed from time to time to learn that our business had
overpaid a vendor twice. And I will even confess that in our
campaign, in the blur of life, we also paid twice there on
occasion. So when you look at the magnitude of the Department
of Defense, it is not at all surprising that this is a
challenge.
Having said that, the testimony this morning, and
particularly, Mr. Blair, for some reason, I just focused in on
what you both said and what you have written in your testimony.
There is a part of me that gets extremely frustrated as a
fellow American to hear this. And the business side of me says,
hey, what a great opportunity to make things better. There is
no shortage of places to look.
I share your view that we have severely, in some cases,
understated the amount of overpayment. And at some point, if
you could, I don't want to spend too much time on this, but if
you could help us quantify that, what your view is; what, you
know, if it is not a billion in the DOD, what is it? It is
certainly higher.
One thing that seems to be absent in the reports that we
are hearing this morning is tying in accountability. This is
going to be a common theme that I am going to bring pretty much
each and every session. When we read about these overpayments--
and I am not looking for a scapegoat. I am not looking to just
fire someone to fire someone, but there does seem to be a lack
of accountability of the personnel. And we need to say, is it
that the process has not been clearly communicated? Have we not
trained our people well? Or, if we have done all of that and we
just have some people who are not performing well, have we held
them accountable?
There is a sense, and you know this just as a fellow
American here, that our Government is not holding people
accountable. We want to promote the people who are doing well,
reward them, have more of an entrepreneurial approach in
Government and also work with and, if necessary, fire someone
who is not performing well.
So, Mr. Blair, if you could comment, please, on, what are
the barriers to better performance? Is it the resources that we
are not funding our auditors enough? Because it seems to me you
would get a good marginal return on allocating more money to
this, certainly with the numbers that I have seen. And then
please comment on the accountability part, both for our
personnel and for the vendors who--some who deliberately are
stealing from the American taxpayer.
Mr. Blair. With regard to resources, I mean, I think that
certainly the DOD IG has sufficient resources to fulfill the
audit mission that we have. There is no lack of opportunities
for us to audit. Because we always end up at the end of every
year with more audits than we have staff for, so we have to
roll some options forward and do them in subsequent years.
I think the Department is dedicating a lot of resources to
improving financial management. And I think it is important to
note that. To make real sustainable progress in financial
management, I think more resources may have to be dedicated to
that in the future. And that is a question that the senior
leadership in the Department are going to have to wrestle with;
how much can they afford to put in this area versus other
areas?
As with regard to accountability, I agree with some of the
statements that you have made. It is very difficult to hold
people accountable in the Federal Government. We oftentimes
find that when we get in and do our audits and we zero in on
the office or the person that was responsible, we have found
that they left. They have retired. They have gone to another
job. But what we are doing is making a more concerted effort,
starting in this fiscal year, in our audit reports to include
recommendations that the Department review the actions of
specific individuals and take appropriate action, as necessary,
to hold people accountable.
Mr. Rigell. Thank you, Mr. Blair.
And so you said we have the resources, but it is because
maybe the person has moved on. And I think we should work
together to help identify maybe the systemic challenges, the
whole process.
And one thing that is somewhat unique to the military is,
you know, every time I meet a senior officer, for example, I
say, well, how long are you going to be here in Hampton Roads?
Well, 2 years, 2 years. And I have known that every time--you
know, let's say you hire somebody to fix the Department, the
first thing they say is, well, boy, what I inherited was
really, really, but I will fix it for you. And then they move
on.
So I wonder if we should consider for these positions
keeping them in the job 6 years and 8 years, and to build a
base to where they could be held accountable in the most
positive sense of the word.
And I would like to circle back around--we will do this off
line, my time is running out here--but I would really like to
know the names of some of these companies who have just had
these egregious examples of overcharging. Because if you really
circle back around, every dollar that is spent for a golf
outing in Paris and France and Singapore, I am sure there is a
young lance corporal in Helmand Province that could use a
little more support. So we need to go after these guys and hold
them accountable. And if they steal from us, put them in jail.
And conversely, the people who are doing a good job, we promote
them. And I just want to build more of that culture in our
Government.
I yield back. Thank you, Mr. Chairman.
Mr. Conaway. Thanks, Scott.
Rob.
Mr. Andrews. Thank all the witnesses.
Mr. Khan, I want to get into your description of the
violation in June 2010 involving the Army's overobligation of
fiscal year 2008 MPA [Military Personnel, Army] Army
appropriation, which Mr. Conaway and I and others have written
a letter about to try to get some more information. Now, I know
that we don't have the facts yet on this, so I am not asking
you to draw a conclusion. But I am asking you to generate some
hypotheses as to how this might happen based upon your
experience. My understanding is what happens here is that it is
discovered, you eventually discover that there is a $200
million transfer by the DOD from the Working Capital Fund to
the Army MPA fund. Is that what happens?
Mr. Khan. That is correct.
Mr. Andrews. And then you say, well, gee, why did this
transfer happen? Essentially, the answer is, well, because we
overobligated the MPA fund by $200 million. Right? Is something
wrong with that? Is that what happens?
Mr. Easton. That is in process. I think that there was
using their transfer authority to transfer money. At the time,
I think the Army's perspective was that they knew that they
needed that money. They had not already overobligated. That is
their perspective, but that is under investigation right now.
Mr. Andrews. Okay. So it is not established that they
overobligated the $200 million?
Mr. Easton. It is being investigated right now.
Mr. Andrews. Let me just say this. Assuming that it were,
that it was the case, and it may not be, but assuming it was
the case, what hypotheses could you generate, Mr. Khan, as to
why that happened?
Mr. Khan. I think it has been established that it was
overobligated.
Mr. Andrews. Whether it has or hasn't, if it were true----
Mr. Khan. Right.
Mr. Andrews [continuing]. Typically, what might the reasons
be that something like that would happen?
Mr. Khan. I mean, pure and simple, there was a lack of
communication between the Army budget office and the program
office. The Army budget office was using estimates or what is
known as bulk obligations on a different set of projections
than what was actually taking place in the field.
This is going back to 2008, when there was an uptick in
recruitment, fuel costs were going up. However, the budget
estimates that the Army budget office was using was still using
old numbers. So, consequently, there was a mismatch----
Mr. Andrews. So they are assuming that they can hire people
and move them around in vehicles at a cost that is actually too
low.
Mr. Khan. That is correct.
Mr. Andrews. So they hire too many people and they drive
too many miles, and they overexpend the account by $200
million.
Mr. Khan. And it was specifically related to permanent
change of stations, PCS [permanent change of station] moves,
where they are moving people around the country. And there was
an uptick in that also.
Mr. Andrews. Now, this is not a rhetorical question, but
how does that happen? I mean, and I think it goes to Mr.
Rigell's question that somebody was figuring this out assuming,
you know, $2 gasoline instead of $4 gasoline. Who did that, and
how did it happen? Do we know?
Mr. Khan. It is a flaw in the estimation process. And
really underlying that is a lack of connection, lack of a good
process which connects where the estimates are being created
and where the actual expenses are taking place.
Mr. Andrews. But in plain English, doesn't somebody say,
gee, you estimated someone is going to drive--fill their tank
with 20 gallons last week, and you estimated it was going to
cost $40, and it cost $80. I mean, doesn't somebody somewhere
along the way figure that out and say, I wonder if all these
projections are therefore flawed? How can you make $200 million
worth of that mistake? Anybody want to take a whack at that
one? That is a rhetorical question.
Mr. Easton. There is no good answer to that. I think
someone should have known. Those accounts, number one, I think
are basically viewed as an entitlement. In other words, we are
supporting the mission. We are managing them centrally, and we
are executing them decentrally without good connectivity. We
have had MILPERS [Military Personnel], ADAs across the board--
--
Mr. Andrews. No one is questioning that when someone has a
permanent change of station, that their family should be moved.
It is an entitlement, absolutely. But that is not the issue.
The issue is whomever is calculating the cost of the moving
van, the other stuff that is going on, is wildly out of whack
here. And I think it goes to the earlier question about
accountability. I would ask that, consistent with the privacy
obligations of the Department, with the chairman's consent,
that you give us a blow-by-blow of what investigation took
place, who was held accountable for that decision, and what
happened to them, again consistent with your Privacy Act
obligations. I think we would like to know that, just kind of
see what happened here.
I yield back on that.
[The information referred to can be found in the Appendix
on page 97.]
Mr. Khan. Mr. Andrews, I just wanted to add one point that
in DOD there are a lot of estimates. And estimates are not a
bad thing as long as they are trued up. It is not a perfect
system. It is like Chairman Conaway had mentioned; it is a
large and complex organization with antiquated systems. So
estimating----
Mr. Andrews. Let me ask just one quick follow-up, if I
could, and I should know this answer. The $200 million is off a
base of how large an account? How large is that account?
Mr. Khan. It is around $43 million--I am sorry, $43
billion.
Mr. Andrews. Okay. So $4 billion is 10 percent of the
account, and $400,000 is 1--$400 million is 1 percent of the
account. So this is one half of 1 percent? That is a small
number, but that is a pretty big number, one half of 1 percent.
That is more than a rounding error. It is outside the standard
deviation, I would think, for an account that size.
Mr. Khan. It is material.
Mr. Andrews. Yeah, it is material. It is one half of 1
percent, but on a $43 billion account, that is pretty serious
money. So I think we would like that kind of report, again
consistent with your Privacy Act obligations.
Mr. Conaway. Thanks, Rob.
And we will reward bad behavior on our side.
Steven.
Mr. Palazzo. Thank you, Mr. Chairman.
I appreciate you all coming out this morning. I think you
all know this is an extremely difficult job, and an important
issue that we are going to--it is pretty difficult to
implement, but it is not impossible.
So we are here to keep putting the pressure on everybody to
make sure it becomes a reality. I had some stock questions, but
my colleagues brought up some points, so I am going to kind of
deviate from them. I will submit those for the record or
something.
When we are talking about ERP, I have never met an ERP that
actually was on time, within budget, and to the owner's
satisfaction. Can you kind of tell me, have you all had any
success stories where we have had an IT [information
technology] integration that actually worked? And who actually
comes up with these timelines? I am sure it is probably a joint
between the person, the consultant selling the service and this
product and the owner that is wanting to purchase it. But why
does it always seem that that is where our time slippage comes
from? Is it just unrealistic expectations? Or is it just one of
those things that you can just never grasp, and this is going
to become a reality for all ERP implementations?
We will start with Mr. Easton.
Mr. Easton. I think it is a combination of things. I think
that we have typically unrealistic schedule estimates,
overestimates when it comes to savings associated with those.
We don't spend enough time up front in terms of really thinking
through the changes in the business that we need to make prior
to implementing. And so, as a result, I think that--and at the
same time, we have a tendency not to want to stop. In other
words, once we are going on the wrong direction, we should
stop.
The one example that I would say has been in general more
successful has been the DLA [Defense Logistics Agency]
enterprise business system, in which case they did have to make
several starts and stops, and they incremented on small scales.
And I think in general that tended to be more successful. But
your track record that you point out, I think, both within the
Government as well as private sector, is accurate.
Mr. Blair. I would have to agree with much of what Mr.
Easton said. The Department is the one who sets the milestone
dates. And those dates are often driven by a lot of external
factors. The 2017 date I think is putting a lot of pressure on
the interim milestone dates, especially as it relates to the
ERPs.
As we go through and audit the ERPs and we identify
problems, we oftentimes make recommendations that the
Department not further implement the system until the problems
are addressed. To this point, I have not seen where the
Department has weighed in on the side of caution. Rather, they
more frequently push forward with implementation, with the idea
that they are going to fix it later. And I am not aware of any
success stories, as you asked earlier, about ERPs being done on
time and within, you know, cost or schedule. I think this is a
very consistent challenge that the Department has to address.
Mr. Khan. Sir, like you pointed out, ERPs are a challenge
to implement, even in a commercial environment. ERP software is
very sensitive. It is very complicated. So it has to be done
right.
There are three observations that we have, GAO has, as far
as ERP implementations within the DOD environment. The first
one is requirements. It is critical that the upfront, like Mr.
Easton had mentioned, the upfront user requirements are
correctly identified so that additional work, slippages, do not
come about in terms of modifying the software once you begin to
implement that. So that is critical.
The other one is, like I had mentioned before, that there
are several legacy systems within DOD. They have got data which
has to be fed into the ERPs. Data conversion is a challenge. It
is unwieldy. I mean, it has to be done somehow, but that is
also a cause of slippages.
And the third one, which is linked to the antiquated
systems, the legacy systems, is the interface, how the older
systems, some of them, they can't be pulled away, like MOCAS
[Mechanization of Contract Administration Services], at least
in the near term. They have to interface with the ERPs. And
that can really complicate matters.
Mr. Palazzo. Kind of running out of time. Real quick, if
there is a repeat offender, someone that is constantly
overcharging the Government, what mechanism do we have in
place, one--and real quick, and whoever is the resident expert
can pick this--to actually seek reimbursement? And also, how do
we debar Federal contractors from doing business with the
Federal Government? That is a loaded question.
Mr. Easton. This is a little bit beyond my area of
expertise, but I think that that was what I was going to say.
There are legal procedures that we can take relative to
debarment. We can serve to be able to recover those and offset
those costs to be able to get that money back, because
frequently we are doing business multiple times with the same
people. But we aggressively go after those folks and then use
the contract administration folks to be able to take the legal
action as appropriate. I defer.
Mr. Palazzo. I am out of time, but thank you. I appreciate
it.
Mr. Conaway. Thanks, Steven.
The Department reported in 2010 improper payments of about
$1.069 billion. Half of that, though, was in personnel or
military pay. Walk us through--there are certain areas, I
guess, like commercial pay, which is not represented on that
list of five, you would expect problems with. But you would
think you would get the pay right. What is in that $500 million
number?
Mr. Easton. In general, I think that we do get the pay
right the vast majority of the times. You know, many of those
improper payments are in fact underpayments. You know, we get
situations, particularly--there are two situations I would
point out. In other words, we will report payments based on
information that we don't have. Members have not provided us
information, say if they get married, that they are entitled to
basic housing allowance or a particular thing. If we don't have
that information, there is a lag, in other words, until we get
that information. So when we actually are able to catch up we
pay that.
Mr. Conaway. Would that be considered an improper payment?
Mr. Easton. Yes.
Mr. Conaway. Even though you are not--okay.
Mr. Easton. Absolutely. And that is that we did not pay
that on time. So we keep track of those things.
The other thing, from a military personnel perspective,
sort of Reserve leave in terms of when reservists go on and off
of Active Duty and their leave has to catch up. And that is
recorded as an improper payment.
Mr. Conaway. Okay.
Mr. Easton. We pay I would say 97 percent, you know, on
time. But still, and Mr. Andrews raised a question, these are
big dollars that are reflected. But it is an ongoing
relationship. We recover money quickly, and we catch up quickly
if we underpay.
Mr. Conaway. I guess I would put those in two different
categories. If a member hasn't reported something to you and
you have got a back pay for something, I wouldn't put that in
the improper payment category because you didn't know. Anyway,
we can talk about that one.
Looking at the problem disbursements, I got a chart from
April 2011 which shows for unmatched disbursements a total of
$111 million, almost ununderstandable descriptor called
negative unliquidated obligations. I have no clue what it
means, but it is 10 million bucks. Zero for the Air Force by
the way.
So, congratulations, Air Force, whoever is out there.
And anyway, and then aged in-transit float. When you say
``aged,'' what is the date on that aging?
Mr. Easton. Over 60 days.
Mr. Conaway. Over 60 days. Why is the Army so much bigger
in their unmatched disbursements than everybody else?
Mr. Easton. A primary driver right now is the
implementation of their ERP GFEBS, the General Funds Enterprise
Business System that they are implementing. That is driving a
significant number of unmatched disbursements. And these are
disbursements that are recorded. And if the Army were here,
they would say that in some cases, they would disagree with the
reporting number. We are in the process of trying to sort that
out. That has been a longstanding, as I look back on the
reports that have been made on improper payments, you know, it
gets into some of the cataloguing issues as the driver.
Mr. Conaway. So how often do you pull that report?
Mr. Easton. Every month.
Mr. Conaway. Every month?
Mr. Easton. Every month.
Mr. Conaway. So, at some point, you would expect the Army
to catch up and that number to drop when they get the GFEBS.
Mr. Easton. Absolutely. And we put that in the FIAR
[Financial Improvement and Audit Readiness] plan, because we
want people to be tracking those. We want people to understand
why we are making these changes, and not just systems changes
but control changes towards auditability that should begin to
reflect in those statistics.
Mr. Conaway. All right.
Mark, in your statement--let me see here--you are talking
about Funds Balance with Treasury. You said that they are not
recorded or were improperly recorded either at Treasury or in
our general ledger. How would they get improperly recorded at
Treasury?
Mr. Easton. They would be--they should be recorded
correctly at Treasury.
Mr. Conaway. Right.
Mr. Easton. In other words, by the time that disbursement,
you know, oftentimes does not get back and reconciled into the
particular chart of accounts where the transaction was
initiated. That is really the key. In other words, oftentimes
the transactions will in fact be recorded at Treasury, but at
an appropriation level, but what we need do is record it into
the individual account and chart of accounts.
Mr. Conaway. Help me understand. I guess I had assumed that
Treasury was just your bank, and the bank didn't really care.
As long as you had money in there, they would clear the
transactions in and out. Is there a recording that goes on at
Treasury within an appropriation category, or why is it that
you are reconciling over there?
Mr. Easton. In other words, we are reconciling; we are
reconciling with Treasury. And Treasury has the transaction
recorded in a vast majority of times. So I may have misspoke on
that particular issue.
Mr. Conaway. That is fine. What happens at year end? We are
on a cash basis, and we have got all these transactions out
there that we are not sure about. How does that get reflected
in the financial statements that we will soon be seeing
November 15ish?
Mr. Easton. The transactions are reflected and in some
cases in an undistributed category. And so I think in the
financial statements, and I can get back to you with specifics,
they would offset receivables and payables. And I think that my
fellow--I think that that would be how they would be recorded,
but they would be disclosed.
[The information referred to can be found in the Appendix
on page 97.]
Mr. Conaway. Okay.
Mr. Easton. Those quantities would be disclosed in the
footnotes.
Mr. Conaway. All right.
We will go a second round.
Rob, you have any questions?
Mr. Andrews. I really don't have a second round question,
but just want to comment that--well, I guess I would ask each
panelist to comment on this, that if you had to identify the
greatest impediment toward zeroing out these improper payments,
if we could only do one thing, what is the thing that you would
have us do to zero out the improper payments?
What do you think, Mr. Easton?
Mr. Easton. I think the internal control emphasis is really
what we need. I mean, systems clearly creates a lot of the
problems. And the issue of accountability that you raised, I
think the environment makes it very, very difficult to
specifically hold people accountable. But we need to do a
better job of that as well. But internal controls and making
sure that we get the people to focus on those controls.
Mr. Andrews. Mr. Blair, what do you think?
Mr. Blair. I agree with some of what Mr. Easton said, but I
want to add a little more specificity to it. I think the
internal controls are key. And there are some specific things
that I think need to be done. More importantly, you need to do
an in-depth analysis of all of the disbursements so you have a
better idea of where your payments are going. But there has to
be controls over all of the payments. Some of the things that I
cited in my testimony, the examples, those are examples where
there is oftentimes an inadequate or absent review process over
the payments that are made, those contract invoices that are
paid. And that is a specific control.
Mr. Andrews. Specifically referring to the commercial
payment problem?
Mr. Blair. Yes, sir.
Mr. Andrews. Okay.
Mr. Khan, what do you think?
Mr. Khan. I just want to say that two important elements,
like I have mentioned in my oral statement, funds control and
payments control. They have to be strengthened if you have to
reach auditability.
And another point I just want to bring out that both funds
control and payments control originate in nonfinancial areas.
Typically, they originate in procurement. So it is critical in
terms of, sir, accountability. I mean, responsibility has to be
taken by other functions. It all ends up in financial
management, where it has to be corrected. But procurement has
to have the training to be able to----
Mr. Andrews. We don't want to create a shoot-the-messenger
problem.
Mr. Khan. Exactly.
Mr. Andrews. The financial people are actually doing their
job reporting the problem. We want to get to the source of why
the problem was created in the first place. I do understand
that. Thank you very much.
Mr. Conaway. There was a bit of a disagreement between--on
the commercial pay category for estimating improper payments.
Mr. Kahn, your team had a vision or view that was different
than what the Department of Defense had. Did you all reconcile
that? Are you comfortable now that those are being estimated,
improper payments, that you used the right methodology?
Mr. Khan. Yes. I mean, the commercial pay was not picked up
for 2010. And based on what the comptroller, Mr. Hale, has
recently said, commercial pays are going to be picked up for
estimating improper pays.
Mr. Easton. We are going to continue. The difference of
opinion--and at the time--and there was a GAO report in 2008 or
2009, I believe. We were complying with the OMB [Office of
Management and Budget] guidance at the time. Subsequent
legislation up here made it very, very clear that we want you
to do statistical sampling to be able to support those
estimates. But I want to make sure that we are clear that there
is a significant amount of prepayment checks that we do. In
fact, we emphasize--this is why I wanted to emphasize the
people aspect. I mean, we put a lot of people and a lot of eyes
on it. But admittedly, much like everything, it is a team
sport. And so it goes to the contracting officer, contract
administration, contract audit. There is a lot of aspects to be
able to do that. But that is the key issue, and I think we
resolved it.
Mr. Conaway. Good.
Just one quick--Mark, you had mentioned that--the internal
control would be owned by you in 2017. I would posit that the
internal control is owned by management today.
Mr. Easton. Absolutely.
Mr. Conaway. I wanted to make sure I understood that.
Mr. Easton. I meant--I guess the key issue that I would
have--and we have this discussion with my colleagues all the
time. Too often--and this gets into the people and the
culture--you know, we have relied on the auditors to come in
and tell us what the issues are. Sort of detective controls.
You know, back in 1982, even going back to 1950 if I look at
the GAO report, clearly management has to assume
responsibility. So what I would want--and we had a recent case
where we were talking about the improper payments, high dollar
value that were reported, management should have done a more
aggressive job, saying this is what--this is why we feel the
way we feel, as opposed to waiting for the auditors to come in.
It is a change in mindset and it is something that goes along--
that management responsibility that is associated with the
audit is something that we have got to change.
Mr. Conaway. Thank you.
Gentlemen, thank you for coming this morning. I want to
thank our panel members as well. Anything--all right.
Mark, Daniel, Asif, any final comments?
All right. Thank you, boys.
We are adjourned.
[Whereupon, at 9:01 a.m., the subcommittee was adjourned.]
=======================================================================
A P P E N D I X
September 22, 2011
=======================================================================
PREPARED STATEMENTS SUBMITTED FOR THE RECORD
September 22, 2011
=======================================================================
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
=======================================================================
WITNESS RESPONSES TO QUESTIONS ASKED DURING
THE HEARING
September 22, 2011
=======================================================================
RESPONSE TO QUESTION SUBMITTED BY MR. CONAWAY
Mr. Easton. In general, these transactions (often referred to as
undistributed disbursements and collections) reflect outlays that have
not been recorded in the lower level field accounting systems, but have
been recorded against the Agency-compiled Department of Defense (DoD),
Office of Management and Budget (OMB), and Department of the Treasury
(Treasury) financial reports. These transactions have been recorded on
a cash basis by Treasury, either through a disbursement or a
collection. If the correct accrual has been established, the dollar
value of these transactions is ``offset'' against these payables (for
disbursements) or receivables (for collections). There are two
categories of undistributed transactions: supported and unsupported.
Some additional detail is provided in the paragraphs below.
Supported undistributed disbursements or collections typically
represent transactions that will properly post, however with a lag in
time. Supported undistributed disbursements are offset against accounts
payable and undistributed collections are offset against accounts
receivable. Adjusting entries are made at the Departmental level using
Treasury United States Standard General Ledger accounts.
Unsupported undistributed balances represent balances that Treasury
has reported, but DoD does not have support to accurately identify the
outlays. Current DoD guidance is to record the unsupported
undistributed disbursements as disbursements in transit, which offsets
the nonfederal accounts payable. Unsupported undistributed collections
are recorded in nonfederal other liabilities. Effective with the first
quarter of Fiscal Year (FY) 2012, the unsupported undistributed
disbursements will be recorded against accounts payable, and
unsupported undistributed collections will be recorded against accounts
receivable. New reporting attributes have been approved that will allow
these balances to be identified within the trial balance.
OMB Circular A-136, ``Financial Reporting Requirements,'' does not
address or require any disclosures, including the amount, for
undistributed disbursements or collections recorded in the financial
statements and footnotes. As such, DoD does not disclose the balances
in the financial statement footnotes. However, DoD includes in Note 1,
``Significant Accounting Policies,'' a disclosure discussing the
treatment for undistributed disbursement and collection. This
disclosure has been included in the DoD financial statements since FY
2004. [See page 20.]
______
RESPONSE TO QUESTION SUBMITTED BY MR. ANDREWS
Mr. Easton. Because the final, formal investigation is not yet
complete, accountability and discipline is yet to be determined. The
information below provides additional detail.
A preliminary Antideficiency Act (ADA) investigation report was
initiated on November 19, 2009, following the Government Accountability
Office (GAO) Decision B-318724, ``Department of the Army--The Fiscal
Year 2008 Military Personnel, Army Appropriation and the Antideficiency
Act,'' dated June 22, 2010. The preliminary investigation resulted in a
potential ADA violation of $200 million, and the Army initiated a
formal ADA investigation in March of 2010. The Army completed the
formal ADA investigation in January 2011, and during the next six
months maintained a dialogue with the Department of Defense Office of
the General Counsel. During this period the case was further refined to
ensure that all relevant information had been included; this has been
particularly critical in supporting assignment of individual
responsibility/accountability. We anticipate an advanced decision in
the near term. A final legal decision (referred to as an ``advance''
decision) is required prior to completing the ADA report and
administering discipline. Once the responsible individual(s) has been
named, and discipline imposed, the report will be finalized and
reported to Congress, in accordance with OMB Circular A-11. Due to this
requirement, and to ensure legal right to due process, the disciplinary
phase of the ADA process may further delay formal submission. We
estimate the final completion date to be December 2011. This formal
report will establish individuals responsible and the discipline
administered.
In its decision of June 22, 2010, the GAO concluded the Army
violated the Antideficiency Act in the Fiscal Year 2008 Military
Personnel, Army appropriation because total obligations exceeded funds
available within the appropriation. This was caused because, as stated
in GAO's decision, ``Army Budget's accounting records, for a period of
time, reflected estimated obligations instead of actual obligations
until it was too late to control the incurrence of obligations in
violation of the Antideficiency Act.'' The Army's investigation finds
that Army program managers within the Deputy Chief of Staff (DCS G-1)
did not record actual obligations in a timely manner, and instead used
estimates as the basis for recording obligations. The Army Budget
Office and DCS G-1 personnel routinely reconciled obligation estimates
to actual disbursements, adjusting obligation estimates as necessary,
and worked with Defense Finance and Accounting Service personnel to
ensure the most accurate actual information was used to update recorded
estimates. A violation occurred because total disbursements exceeded
estimated obligations and funds available within the subdivision
provided to DCS G-1. [See page 16.]
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