[Senate Hearing 112-297]
[From the U.S. Government Printing Office]
S. Hrg. 112-297
FINANCIAL MANAGEMENT AND BUSINESS TRANSFORMATION AT THE DEPARTMENT OF
DEFENSE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON READINESS AND MANAGEMENT SUPPORT
of the
COMMITTEE ON ARMED SERVICES
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
JULY 27, 2011
__________
Printed for the use of the Committee on Armed Services
Available via the World Wide Web: http://www.fdsys.gov/
__________
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COMMITTEE ON ARMED SERVICES
CARL LEVIN, Michigan, Chairman
JOSEPH I. LIEBERMAN, Connecticut JOHN McCAIN, Arizona
JACK REED, Rhode Island JAMES M. INHOFE, Oklahoma
DANIEL K. AKAKA, Hawaii JEFF SESSIONS, Alabama
E. BENJAMIN NELSON, Nebraska SAXBY CHAMBLISS, Georgia
JIM WEBB, Virginia ROGER F. WICKER, Mississippi
CLAIRE McCASKILL, Missouri SCOTT P. BROWN, Massachusetts
MARK UDALL, Colorado ROB PORTMAN, Ohio
KAY R. HAGAN, North Carolina KELLY AYOTTE, New Hampshire
MARK BEGICH, Alaska SUSAN M. COLLINS, Maine
JOE MANCHIN III, West Virginia LINDSEY GRAHAM, South Carolina
JEANNE SHAHEEN, New Hampshire JOHN CORNYN, Texas
KIRSTEN E. GILLIBRAND, New York DAVID VITTER, Louisiana
RICHARD BLUMENTHAL, Connecticut
Richard D. DeBobes, Staff Director
David M. Morriss, Minority Staff Director
______
Subcommittee on Readiness and Management Support
CLAIRE McCASKILL, Missouri, Chairman
DANIEL K. AKAKA, Hawaii KELLY AYOTTE, New Hampshire
E. BENJAMIN NELSON, Nebraska JAMES M. INHOFE, Oklahoma
JIM WEBB, Virginia SAXBY CHAMBLISS, Georgia
MARK UDALL, Colorado ROB PORTMAN, Ohio
MARK BEGICH, Alaska SUSAN M. COLLINS, Maine
JOE MANCHIN III, West Virginia LINDSEY GRAHAM, South Carolina
JEANNE SHAHEEN, New Hampshire JOHN CORNYN, Texas
(ii)
C O N T E N T S
__________
CHRONOLOGICAL LIST OF WITNESSES
Financial Management and Business Transformation at the Department of
Defense
july 27, 2011
Page
Hale, Hon. Robert F., Under Secretary of Defense, Comptroller;
Accompanied by Hon. Elizabeth A. McGrath, Deputy Chief
Management Officer, Department of Defense...................... 20
Matiella, Hon. Mary Sally, Assistant Secretary of the Army,
Financial Management and Comptroller........................... 26
Commons, Hon. Gladys J., Assistant Secretary of the Navy,
Financial Management and Comptroller........................... 30
Morin, Hon. Jamie M., Assistant Secretary of the Air Force,
Financial Management and Comptroller........................... 32
Khan, Asif A., Director, Financial Management and Assurance,
Government Accountability Office............................... 36
Annex: The Analysis of Alternatives for the Global Combat Support
System-Army.................................................... 102
(iii)
FINANCIAL MANAGEMENT AND BUSINESS TRANSFORMATION AT THE DEPARTMENT OF
DEFENSE
----------
WEDNESDAY, JULY 27, 2011
U.S. Senate,
Subcommittee on Readiness and
Management Support,
Committee on Armed Services,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:09 p.m., in
room SR-232A, Russell Senate Office Building, Senator Claire
McCaskill (chairman of the subcommittee) presiding.
Committee members present: Senators McCaskill, Begich,
Manchin, Portman, Ayotte, and Cornyn.
Committee staff members present: Leah C. Brewer,
nominations and hearings clerk; and Jennifer L. Stoker,
security clerk.
Majority staff member present: Peter K. Levine, general
counsel.
Minority staff members present: Pablo E. Carrillo, minority
investigative counsel; and Lucian L. Niemeyer, professional
staff member.
Staff assistants present: Brian F. Sebold and Breon N.
Wells.
Committee members' assistants present: Tressa Guenov,
assistant to Senator McCaskill; Lindsay Kavanaugh, assistant to
Senator Begich; Joanne McLaughlin, assistant to Senator
Manchin; Brent Bombach, assistant to Senator Portman; Brad
Bowman, assistant to Senator Ayotte; and Dave Hanke, assistant
to Senator Cornyn.
OPENING STATEMENT OF SENATOR CLAIRE McCASKILL, CHAIRMAN
Senator McCaskill. Thank you, everyone, for joining us
today for this hearing.
The Readiness and Management Support Subcommittee meets
today to address the issues of financial management and
business transformation at the Department of Defense (DOD). We
are pleased to be joined by the Honorable Robert Hale, DOD
Comptroller; the Honorable Elizabeth A. McGrath, the DOD Deputy
Chief Management Officer (CMO); the Comptrollers of the three
Military Departments; and Mr. Asif A. Khan, Director of
Financial Management and Assurance at the Government
Accountability Office (GAO).
Welcome to all of you, and thank you for your participation
in this very important hearing.
GAO first designated DOD financial management as high risk
in 1995, as a result of pervasive financial and related
business management systems and control deficiencies. These
deficiencies, GAO reported, have adversely affected DOD's
ability to control costs, ensure basic accountability,
anticipate future costs and claims on the budget, measure
performance, maintain funds control, prevent and detect fraud,
waste, and abuse, address pressing management issues, and in
some ways maybe the most important of all, the ability to
prepare auditable financial statements.
Over the last decade, this committee has initiated a series
of legislative provisions designed to address these problems as
recommended by GAO. Unfortunately, we continue to hear reports
that soldiers in the field have received the wrong paychecks,
that DOD cannot account for expenditures of billions of dollars
in Iraq and Afghanistan, and that DOD cannot reliably determine
the number of contractors it employs.
Before leaving office earlier this month, Secretary Gates
likened his efforts to find efficiencies and reduce waste in
DOD to something akin to an Easter egg hunt. He stated, ``My
staff and I learned that it was nearly impossible to get
accurate information and answers to questions such as `How much
money do you spend?' and `How many people do you have?' ''
The underlying problem is that DOD financial management
systems are riddled with decades-old problems that are
difficult to reverse. As GAO recently explained, the DOD
systems environment that supports its business functions is
overly complex and error prone and is characterized by: one,
little standardization across DOD; two, multiple systems
performing the same tasks; three, the same data stored in
multiple systems; and four, the need for data to be entered
manually into multiple systems.
According to DOD's systems inventory, this environment--now
this is hard to believe--is composed of 2,258 business systems
and includes 335 financial management, 709 human resource
management, 645 logistics, 243 real property installation, and
281 weapon acquisition management systems.
DOD is endeavoring to address these problems by fielding a
series of enterprise resource planning (ERP) programs. I hate
acronyms, but it is very hard to function on the Senate Armed
Services Committee without getting close and personal with
acronyms.
So for everyone, and the public particularly, you should
know that ERP is basically shorthand for ``We are trying to get
our arms around it.'' Which are intended to provide timely,
reliable, accurate, and useful information for management
decisions.
Unfortunately, these programs have not lived up to
expectations. The Financial Improvement and Audit Readiness
(FIAR) plan itself indicates that all three Military
Departments have already missed deadlines on the implementation
of their ERP systems. Last year, GAO reported that six of DOD's
nine largest ERP programs had experienced schedule delays
ranging from 2 to 12 years and incurred cost increases ranging
from $530 million to $2.4 billion, in significant part because
of DOD's failure to follow good management practices.
Similarly, the DOD Inspector General (IG) reported last
month that the Army's General Fund Enterprise Business System
(GFEBS), or its ERP system, is at high risk of incurring
additional schedule delays, exceeding planned cost, and not
meeting program objectives as a result of inadequate planning
and integration efforts.
Even if the GFEBS is deployed in a timely manner, the IG
reported, it may not meet the Army's financial management
objectives. In particular, the IG reported that the Army has
not adequately planned for data conversion from existing
systems to the GFEBS, failing completely to address the
conversion of historical transaction data and the conversion of
data from 49 non-Army systems.
According to the IG, these flaws mean that even if the Army
fully deploys GFEBS in a timely manner, the Army will not be
able to achieve its objective of auditable financial
statements. I am deeply concerned that the shortcomings
documented by the IG in the Army's GFEBS program are
symptomatic of problems with the other ERP systems and that
these problems will undermine DOD's efforts to address its
financial management issues and achieve an auditable financial
statement by 2017.
Sound financial systems and good data are critical to our
efforts to provide efficient management, save money, and ensure
accountability at DOD. We simply have to do better.
At this time, I would like also to insert a useful document
into the record. Thanks to Senator Coburn's efforts, this
document was prepared by the Congressional Research Service to
chronicle the timeline of DOD's efforts since 1990 to achieve
an unqualified audit.
It is a document that I recommend to everyone for their
perusal. I think it is an excellent history for the public to
know about. So I want it to be added to the record at this
time, followed by my prepared statement.
[The information referred to follows:]
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Prepared Statement by Senator Claire McCaskill
The Readiness and Management Support Subcommittee meets today to
address the issues of financial management and business transformation
at the Department of Defense (DOD). We are pleased to be joined by the
Hon. Robert F. Hale, the DOD Comptroller; the Hon. Elizabeth A.
McGrath, the DOD Deputy Chief Management Officer; the Comptrollers of
the three Military Departments; and Asif A. Khan, Director of Financial
Management and Assurance at the Government Accountability Office (GAO).
Welcome to all of you, and thank you for your participation in this
important hearing.
The Government Accountability Office first designated DOD financial
management as a ``high risk'' area in 1995, as a result of ``pervasive
financial and related business management systems and control
deficiencies.'' These deficiencies, GAO reported, have adversely
affected the Department's ability to control costs; ensure basic
accountability; anticipate future costs and claims on the budget;
measure performance; maintain funds control; prevent and detect fraud,
waste, and abuse; address pressing management issues; and prepare
auditable financial statements.
Over the last decade, this committee has initiated a series of
legislative provisions designed to address these problems, as
recommended by GAO. Unfortunately, we continue to hear reports that
soldiers in the field have received the wrong paychecks; that the
Department cannot account for expenditures of billions of dollars in
Iraq and Afghanistan; and that DOD cannot reliably determine the number
of contractors it employs. Before leaving office earlier this month,
Secretary Gates likened his efforts to find efficiencies and reduce
waste in the Department to ``something akin an Easter egg hunt.'' He
stated: ``My staff and I learned that it was nearly impossible to get
accurate information and answers to questions such as 'How much money
do you spend?' and `How many people do you have?''
The underlying problem is that DOD's financial management systems
are riddled with decades-old problems that are difficult to reverse. As
GAO recently explained:
``[T]he DOD systems environment that supports [its] business
functions is overly complex and error prone, and is
characterized by: (1) little standardization across the
department, (2) multiple systems performing the same tasks, (3)
the same data stored in multiple systems, and (4) the need for
data to be entered manually into multiple systems. . . .
According to the department's systems inventory, this
environment is composed of 2,258 business systems and includes
335 financial management, 709 human resource management, 645
logistics, 243 real property and installation, and 281 weapon
acquisition management systems.''
The Department is endeavoring to address these problems by
information for management decisions. Unfortunately, these programs
have not lived up to expectations. The FIAR plan itself indicates that
all three Military Departments have already missed deadlines on the
implementation of their enterprise resource planning (ERP) systems.
Last year, GAO reported that six of DOD's nine largest ERPs had
experienced schedule delays ranging from 2 to 12 years and incurred
cost increases ranging from $530 million to $2.4 billion--in
significant part because of the Department's failure to follow good
management practices.
Similarly, the DOD Inspector General (IG) reported last month that
the Army's General Fund Enterprise Business System (GFEBS) program is
at ``high risk of incurring additional schedule delays, exceeding
planned costs, and not meeting program objectives'' as a result of
inadequate planning and integration efforts. Even if GFEBS is deployed
in a timely manner, the IG reported, it may not meet the Army's
financial management objectives. In particular, the IG reported that
the Army has not adequately planned for data conversion from existing
systems to GFEBS, failing completely to address the conversion of
historical transaction data and the conversion of data from 49 non-Army
systems. According to the IG, these flaws mean that even if the Army
fully deploys GFEBS in a timely manner, the Army will not be able to
achieve its objective of auditable financial statements.
I am deeply concerned that the shortcomings documented by the IG in
the Army's GFEBS program are symptomatic of problems with other ERP
systems and that these problems will undermine the Department's efforts
to address its financial management issues and achieve an auditable
financial statement by 2017.
Sound financial systems and good data are critical to our efforts
to provide efficient management, save money, and ensure accountability
at the Department of Defense. We simply have to do better.
Senator McCaskill. I will now turn the microphone over to
Senator Ayotte if she would like to make an opening statement.
STATEMENT OF SENATOR KELLY AYOTTE
Senator Ayotte. Thank you very much, Madam Chairman.
I want to welcome our witnesses and thank them for
appearing today.
I understand that this is the first hearing the Senate
Armed Services Committee has held on defense financial
management and business transformation in several years. So I
want to thank the chairman for scheduling this meeting.
This hearing goes to the heart of the fiscal crisis that
faces our Nation. As Admiral Mullen has said, the greatest
threat to our national security is our national debt. We need
to work to address that fiscal crisis, and obviously, with what
we are looking at on a national level, DOD needs to be included
in that process.
We have to closely scrutinize every single Federal agency,
including DOD, to identify and eliminate wasteful or
duplicative programs. However, as we reduce defense spending,
we must ensure that those reductions do not undercut our
warfighters or endanger our readiness for future contingencies.
To distinguish between necessary defense budget cuts and
cuts that would harm our troops and damage readiness, we must
have reliable financial data and effective business processes
and systems in place. Unfortunately, DOD is one of the few
agencies in the entire Federal Government that cannot pass an
independent audit of its finances. I am skeptical whether DOD
will even be ready for an audit by 2017, as required by the
law.
DOD's inability to be audited could limit its ability to
successfully implement management controls and efficiency
initiatives, achieve savings, and redirect increasingly scarce
defense dollars to the higher priorities.
Shortly before Secretary Gates left office, he publicly
expressed frustration that his efforts to find efficiencies and
reduce wastes were ``something akin to an Easter egg hunt.'' He
explained: ``My staff and I learned that it was nearly
impossible to get accurate information and answers, such as
`How much money do you spend?' and `How many people do you
have?' ''
In light of the fiscal crisis we are confronting and the
many proposals to cut defense spending, these are questions
that we must be able to answer. I am encouraged that Secretary
of Defense Leon Panetta has said that making DOD auditable is a
top priority and that he will look into actually accelerating
the current timetable for achieving this important goal.
But it is important to remember that the auditable
financial statement is not really the desired objective. It is
a means to a more important end. DOD must be auditable and we
must have reliable financial data so that we can be responsible
stewards of the taxpayers' dollars and so that we can ensure
that every dollar supports our warfighters and improves our
military readiness.
Let there be no doubt, careful investment in financial
management can save money. The Defense Information Systems
Agency (DISA), for example, has returned $10 for every $1 spent
on financial improvement. The Marine Corps has achieved $3 for
every $1 invested in improved financial management.
Senator Tom Coburn estimates, as the chairman has mentioned
and, of course, introduced the document that CRS produced, and
I want to commend her for doing that. It is a very important
document. Senator Tom Coburn estimates that DOD could realize
at least $25 billion in savings each year for the next 10 years
through improved financial management.
In preparing for this hearing, staff polled several experts
inside and outside of Government regarding the most significant
structural impediments to improving financial management and
business processes and systems at DOD. There seems to be a
consensus regarding the leading impediments to improving
financial management, and that is some of these impediments
include unclear lines of authority, a workforce not
sufficiently trained in key components of financial management,
as well as potentially ineffective accountability and
oversight.
There are also potential problems related to enterprise
architecture and investment controls as well as, the chairman
has mentioned, with the implementation of the ERP systems. Here
are some important questions I hope to address at this hearing.
Do those leading DOD's financial improvement efforts have
the authority needed to influence the Service Secretaries and
military chiefs, as well as other political appointees within
DOD, to ensure that what is required to succeed actually gets
done?
How well are current oversight mechanisms within DOD
functioning?
Is DOD's financial management workforce sufficiently
trained and certified in accounting, well-versed in Government
accounting practices and standards, and experienced in relevant
information technology?
Is DOD's FIAR plan on a path to succeed?
I am troubled by cases where we are spending billions of
dollars on ERPs that accomplish little more than lining the
pockets of contractors who are hired to integrate them into
DOD. In a few high-profile cases, new systems have come online
at considerable expense to the taxpayers, but the relevant
entities are still unable to pass an audit. Every dollar must
be spent deliberately and carefully to achieve the desired
objective.
Thank you, again, Madam Chairman, for calling this
important hearing. I look forward to hearing from the
witnesses, and I look forward to working together to improve
financial management at DOD. Improved financial management will
help us make the tough decisions we need to make, eliminate
waste, and support our warfighters.
I want to thank all of you for being here today.
Senator McCaskill. Since this topic is rather dry, and
typically, we don't have hordes of Senators show up, I want to
particularly comment on both Senator Cornyn and Senator Begich
being here. I had not planned on giving anyone else an
opportunity to make an opening statement, but I am so proud of
you for showing up----[Laughter.]
I want to give both of you an opportunity, if you would
like, to make a few comments on the record.
Senator Cornyn.
Senator Cornyn. Madam Chairman, thank you for having this
very important hearing.
I am called away to the Judiciary Committee to introduce a
Texan who is being nominated for a judicial office. So I am
going to be leaving now, and I will come back.
I have some questions for the witnesses, but no opening
statement.
Thank you for the opportunity.
Senator McCaskill. Thank you, Senator.
Senator Begich.
Senator Begich. I am glad we could surprise you, Madam
Chair. That is always good. [Laughter.]
But I really don't have any opening statement. I am anxious
for the testimony. You have a great lineup, as I saw when I
decided to be able to make it over here for at least an hour, I
think, I can be here for.
Senator McCaskill. Great.
Senator Begich. So I look forward to it.
Thank you.
Senator McCaskill. Thank you, Senator.
We will start with Secretary Hale.
STATEMENT OF HON. ROBERT F. HALE, UNDER SECRETARY OF DEFENSE,
COMPTROLLER; ACCOMPANIED BY HON. ELIZABETH A. McGRATH, DEPUTY
CHIEF MANAGEMENT OFFICER, DEPARTMENT OF DEFENSE
Mr. Hale. Good afternoon, Madam Chairman, Senator Ayotte,
and Senator Begich.
Thank you for the opportunity to discuss financial
management at DOD. Secretary Panetta, as you have said, our new
Secretary of Defense, my new boss, shares your interest in
financial management, shares my interest in financial
management improvements, and has asked that I provide him a
comprehensive review of our efforts. I look forward to his
personal guidance.
To bring you up-to-date on our progress and also our
continued challenges, DOD's Deputy Chief Financial Management
Officer (DCMO), Ms. McGrath, and I have prepared a joint
statement. I am going to summarize it briefly for the both of
us, and then we will turn to the service financial management
(FM) executives.
The first thing to note is that as we work to meet national
security objectives, DOD financial management has its
strengths. I know that is not popular, but I believe it is
true.
For one thing, I think it is effective in getting the
financial resources that we need to our warfighters, and I view
that as my primary job. We do have a dedicated workforce, I
think a reasonably well-trained one--let us talk more about
that later--more than 60,000 financial management professionals
who bring a culture of stewardship, certainly my experience for
7 years in the Air Force, a culture of stewardship to their
jobs.
We have effective processes in some key areas. As a result,
violations of key financial laws are few. Much better, I might
add, than in the non-defense agencies. Timely and accurate
payments are the rule. Again, much better than in the non-
defense agencies, and interest associated with late payments is
low.
We have also made progress on an issue that is of concern
to me--I have been working on it for several decades as a
professional--and I know to you, improving financial
information and moving toward audit readiness. We have
auditable financial statements in a couple of large
organizations, particularly in the Army Corps of Engineers,
several of the large defense agencies, and several of our large
trust funds.
But it is also clear that our greatest audit challenges lie
ahead, especially the need to move the Military Services to
auditability. We really have been picking around the edges of
this problem, to some extent. We have to turn to them because
they are the key issue. In addition, there are enterprise-wide
weaknesses in DOD financial management, without question, and
they require an enterprise-wide response.
To pass an audit, an organization needs systems and
processes that record financial results of business events in a
consistent and reliable manner. Our current business
environment does not always meet that standard. Many of our
systems are old, and they weren't designed to handle
information that supports audit standards.
The issue is even more challenging because of DOD's
enormous size and geographical dispersion, which makes a manual
solution of these problems almost impossible. Some of the
smaller independent agencies have been able to do that. We
simply can't.
To deal with these enterprise challenges and to improve
financial information and achieve audit readiness, we have
revised the approach that DOD has used in the past. It wasn't
working, I think we can all agree.
Since August 2009, our emphasis has been improving the
quality of data and moving toward audit readiness for the
information that we use every day to manage DOD. Specifically,
budgetary information and existence and completeness of assets.
Knowing where our assets are and how many we have.
We have also put in place a cost-effective approach to
dealing with the other information that is needed to move
toward full auditability. Less than 2 years have passed since
we launched this new approach. I call it the focused approach.
I can tell you that financial auditability is now readily
acknowledged as a high priority in DOD. I think it will be even
a higher priority under my new boss.
We have made some noteworthy changes, I think, that are
moving us in the right direction. We have a clear governance
process headed by our DOD CMO, Deputy Secretary, and supported
at the Office of the Secretary of Defense (OSD) level by me,
the Chief Financial Officer (CFO), and the DCMO, and by the
Service FMs and the Service DCMOs.
We have established long-term and, particularly
importantly, short-term goals which are actively managed by our
governance bodies. We have ensured that each Military
Department has programmed adequate resources to support this
focused strategy over the entire Future Years Defense Plan.
We now require, and I think this is important, that senior
executive performance appraisals for both financial and
nonfinancial personnel include financial and audit goals where
that is relevant to them. We are assembling teams within each
Military Department that will be tasked with improving
financial controls because we need to do that if we are going
to be successful.
We are establishing a course-based certification program
for our defense financial managers that will give us a
framework like they have in the acquisition workforce so that
we can require certain courses of our personnel and ensure, for
example, that they have training in accounting and auditing. We
have maintained a close working relationship with our oversight
bodies, including GAO and the DOD IG. I have personally briefed
Gene Dodaro, the Comptroller General, and Gordon Heddell, the
DOD IG.
In addition, we have focused our improvement on
improvements in business systems, and I know you are
particularly interested in these. Our goal is a streamlined
systems environment made up of information technology (IT)
capabilities that work together to support effective and
efficient processes and operations.
Ms. McGrath, the DCMO, has the lead for OSD. The Services
and agencies are managing overall implementation. We are
focusing our system efforts in three areas--improvements in
acquiring and implementing IT systems, including those,
implementing those ERPs, that word you don't like, Madam
Chairman; reducing required data exchanges and system-to-system
interfaces while increasing standardization; and use of
business enterprise architecture, which provides data
standards, business rules, performance metrics, and standard
system configurations.
In addition to procedural changes, though, we are actually
doing something. We are actually moving and taking tangible
steps toward auditability of the service statements that big
boys use in the audit world. We have launched an audit of the
Marine Corps statement of budgetary resources. If successful,
this would be the first time that any military Service has
completed an audit of a financial statement.
In May, we began a DOD-wide examination and validation of
our funds control and distribution process, known in audit
terms as appropriations received. This is being done by an
independent public accounting firm. I expect that this
validation will yield a positive opinion in August, and
periodic validations of our appropriations received will
demonstrate to Congress and to me that we are controlling our
funds carefully and in ways that ensure we comply with the laws
that you enact.
In June, we began a validation by a public accounting
organization of the Army's organization and bases that have
implemented their ERP, the GFEBS. This will identify any areas
that must be improved to ensure that we are using the system in
a manner that is auditable. I don't want to get these things
deployed throughout DOD and find out that we aren't going to
achieve our goal.
In July, we tasked a public accounting firm to validate the
Air Force's processes and controls to reconcile their accounts
with Treasury, essentially their checkbook with Treasury. It is
called Funds Balance with Treasury.
By the end of the calendar year, we expect to begin several
other validation efforts, including the accounts and locations
of large portions of our military equipment. In short, there is
a lot still to do. I make no bones about it. We have a long way
to go, but I think we are making progress.
I believe we do have a plan. We are committed to improving
financial information and achieving audit readiness in DOD. Our
goal is to achieve auditable financial statements by 2017.
Madam Chairman, this concludes my opening statement. I
believe we will turn to the Service FMs now, and then we will
be glad to answer your questions.
[The joint prepared statement of Mr. Hale and Ms. McGrath
follows:]
Joint Prepared Statement by Hon. Robert F. Hale and
Hon. Elizabeth A. McGrath
Chairman McCaskill, Senator Ayotte, members of the subcommittee,
thank you for the opportunity to testify today concerning financial
management at the Department of Defense (DOD) and our ongoing efforts
to improve financial operations. We should note that this is an area of
interest to our new Secretary of Defense. Secretary Panetta has asked
us to join with other Department leaders to review our plans for
financial improvement and report back to him with any suggested
improvements.
From our perspective, there are two principal reasons for striving
to make DOD as efficient and effective a manager as possible. The first
is to ensure that America's service men and women have the resources
they need to carry out their mission. The second reason is to satisfy
our duty as stewards of the resources entrusted to us by the taxpayers.
As Members of the U.S. Senate, you have a great interest in both
purposes. Moreover, your oversight and interest in this subject is a
great help to us as we go forward.
BACKGROUND AND CONTEXT
As we pursue these dual goals, we rely on the support of a
dedicated professional work force of approximately 60,000 financial
management personnel, who provide our warfighters with the resources
and financial services they need to meet national security objectives
in every area of the world, including Afghanistan and Iraq. We know
that you appreciate their efforts as much as we do.
Today, the Department has effective financial processes in many key
areas. As a result, our violations of the key financial laws are quite
low, timely and accurate payments are produced in a very high
percentage of cases, while interest payments have been dramatically
reduced.
In fact, there has been significant progress toward improving
financial information and audit readiness in several entities. For
example, the Army Corps of Engineers has fully auditable financial
statements and is maintaining them. Several Defense Agencies maintain
auditable statements including the Defense Finance and Accounting
Service and the Defense Contract Audit Agency. Several large trust
funds managed by DOD are also auditable.
At the same time, it is clear that the most daunting challenges
remain ahead, particularly the challenge of moving the Military
Services toward auditability. Moreover, we know that there are
enterprise-wide weaknesses in DOD financial management, and they demand
an enterprise-wide business response. The lack of auditable financial
statements for DOD as a whole reflects those weaknesses.
The challenge is more daunting because of DOD's enormous size and
geographical dispersion. For example, we obligate an average of $2
billion to $3 billion every business day and handle hundreds of
thousands of payment transactions. These financial transactions take
place in thousands of locations worldwide, including war zones. Given
our size and mission requirements, we are not able to deploy the vast
numbers of accountants that would be required to fully meet audit
standards.
To pass an audit, an organization is required to have a business
environment--including systems and processes--that record the financial
results of business events (such as contract signing) in a consistent
and reliable manner. Our current business environment does not always
meet that standard. Many of our systems are old and handle or exchange
information in ways that do not readily support current audit
standards. They were designed decades ago to meet budgetary rather than
proprietary accounting standards. They tend to be non-standard and
sometimes do not include strong financial controls. In these cases, the
consistent application of internal controls becomes critical. Many of
the legacy systems also do not record data at the transaction level, a
capability essential to audit success.
AN ENTERPRISE-WIDE RESPONSE
To address these enterprise-wide issues, we have put in place a
strong governance model. As the Department's Chief Management Officer
(CMO), the Deputy Secretary is responsible for Department-wide business
operations and management issues. He is supported in this by the Deputy
Chief Management Officer (DCMO).
The Under Secretary of Defense (Comptroller) (USD(C)) and Chief
Financial Officer is responsible for financial management policy and
operations for the Department. He has the lead in efforts to improve
financial information and audit readiness. But the Comptroller
organization cannot improve financial management on its own. The
Department will achieve its financial management goals only through an
active partnership involving both the Comptroller and the DCMO. We must
also have help from those in acquisition, logistics, and other business
areas, as well as the business communities that reside in the Military
Departments.
To inject this holistic, integrated way of thinking into the
existing fabric of defense management, the DCMO has established a
framework for organizing our Business Enterprise Architecture (BEO),
business processes, and systems environment into essential end-to-end
business processes, such as Budget-to-Report, Order-to-Cash, and
Procure-to-Pay. This enterprise-wide approach is building the future
business processes and systems environment of DOD, with audit readiness
and management information in mind.
improving the quality of the information we use every day
To deal with these enterprise challenges--and to improve financial
information and achieve audit readiness--we revised our approach from
those pursued by DOD in the past.
Our strategy revision was shaped by senior leaders in the
Comptroller and DCMO organizations and in the Military Departments and
Defense agencies. We also solicited input from the Office of Management
and Budget, the Government Accountability Office (GAO), and
congressional staff.
In August 2009, we issued a memorandum outlining the new approach,
which emphasizes improvements in the quality, accuracy, and reliability
of the financial and asset information that we use every day to manage
the Department. This approach leads to our current concentration on
areas that are most important to defense managers while holding down
costs in a period of budgetary constraints. Specifically, we are
working on two types of information--budgetary information and
existence and completeness of assets.
Budgetary information is critical to leadership at all levels, as
people make operational and resource allocation decisions. Our new
approach on improving budgetary information will lead to audit
readiness for our Statements of Budgetary Resources (SBR).
We are also focusing on the accuracy in the numbers and locations
of our mission critical assets. The financial audit elements of
``existence and completeness'' translate directly into knowing ``what
we have'' and ``where it is,'' so we can use the equipment in combat
and ensure that our acquisition organization is buying only what DOD
needs.
We have not ignored other efforts necessary to achieve fully
auditable statements. This spring we completed a business case analysis
that was required by key stakeholders and included as a provision in
the National Defense Authorization Act (NDAA) for Fiscal Year 2011.
This analysis provides a roadmap to a cost-effective way for achieving
auditability for financial statements beyond the SBR.
The NDAA for Fiscal Year 2010 and subsequent acts accommodated our
new approach to financial improvement and audit readiness. We
appreciate the support of Congress and remain committed to have fully
auditable statements by 2017.
SYSTEM IMPROVEMENTS ARE CRITICAL TO SUCCESS
To achieve and sustain auditable financial statements, even using
this new approach, we must improve our financial systems.
To accomplish this, we must orient the DOD around end-to-end
business processes that support audit goals, implement Enterprise
Resource Planning (ERP) systems, leverage those investments to the
maximum extent practicable, modernize legacy systems when necessary and
supported by a business case, and also aggressively sunset legacy
systems that are obsolete, redundant, or not aligned with our business
objectives. Our goal is to deliver a streamlined, 21st-century systems
environment comprised of IT capabilities that work seamlessly together
to support effective and efficient business processes and operations.
The DCMO and the Military Department CMOs play an integral role in the
governance processes overseeing the implementation of these systems and
the processes they enable.
We are focusing on three key areas:
First, we have taken steps to improve our current approach to
acquiring and implementing IT systems, particularly in the business
domain. Important revisions to the Department's standard acquisition
process will be included in an update to the DOD Instruction 5000.2,
``Operation of the Defense Acquisition System,'' for IT systems. These
revisions will include an improved acquisition model for our defense
business systems, called the Business Capability Lifecycle, which is in
use today for a growing number of programs and is an essential pilot
effort for our broader IT reform effort. The Deputy Secretary has made
clear that one of his highest management priorities is improving the
acquisition, development, and fielding of IT systems.
Further, in addition to improving acquisition policy, the
Department is working to improve specific acquisition outcomes of its
business Major Automated Information System programs through more
rigorous acquisition oversight and investment review. The Department is
more closely tying business outcomes to acquisition milestones and
specifically requiring that individual programs, such as Army's General
Fund Enterprise Business System (GFEBS) and Navy ERP, define the role
that they play in their organizations' auditability efforts and end-to-
end processes. For example, in the last GFEBS Acquisition Decision
Memorandum, signed June 24, 2011, we explicitly required that GFEBS:
Obtain the USD(C) and DOD DCMO approval of the end-to-
end process and system portions of the Army plan to achieve
audit readiness by September 2017 as defined in Financial
Improvement and Audit Readiness (FIAR) Guidance. Specifically,
the Army plan must address the GFEBS role in achieving audit
readiness in the work products defined in phases 1 and 3 of the
FIAR Guidance Methodology.
Obtain USD(C) concurrence that the end-to-end business
systems and processes within Army control support auditable
financial statements where GFEBS has been implemented and
integrated. The USD(C) will rely on the opinion of an
independent public accounting firm expressed in an examination
of the Army audit readiness assertion of a GFEBS entity
currently planned for December 31, 2012 and will allow for
remaining minor system and process enhancements scheduled for
completion within 12 months.
Second, we are defining a target systems architecture that is
modeled on the premise of end-to-end business processes and uses the
capability inherent in our ERP systems to the maximum extent
practicable. This will minimize the number of required data exchanges
and system-to-system interfaces, thus reducing the potential for error.
It will also increase the degree of process standardization and cut
down on unnecessary software development.
Third, we will continue to guide our system investments using the
BEA, which defines the necessary data standards, business rules,
performance metrics, and standard system configurations that will allow
our systems to be interoperable. This, along with our Enterprise
Transition Plan, will ensure that when data is exchanged between
systems, it happens securely and maintains the integrity of the data.
Improved systems alone, however, will not eliminate our weaknesses
or guarantee auditable statements. Achieving auditability requires that
we apply a consistent level of process controls that cross
organizations and functional areas. Business and financial information
that is passed from system to system must also be subject to a control
environment to ensure that only authorized personnel are using the
system and that these systems protect the data quality and maintain a
compliant audit trail within the end-to-end business process. This
process must be controlled at the transaction level, from the source to
the general ledger postings, accurate trial balances, and reliable
period closeouts. Only by completing these steps can we prepare
financial statements that an auditor can cost-effectively review and
verify. Many elements of our current business environment must be
changed to allow us to meet financial audit standards. In the midst of
two wars and numerous military operations, implementation of our new
approach will continue to be a major challenge.
WHERE WE ARE TODAY
Less than 2 years have passed since we took stock of our previous
efforts and decided on new priorities designed to bring the various
functional communities together to work toward the common goal of
financial auditability. Financial auditability is now accepted as a
high priority for the Department. To move forward with our new, focused
approach, we have made many changes:
We established a clear governance process with the
Department's CMO in the lead and the USD(C) and DCMO playing
key roles.
We established clear but flexible guidance, so the
components can prepare to assert audit readiness by developing
detailed plans for their discovery and remediation efforts.
We have engaged the Department's CMO (the Deputy
Secretary), as well as the Military Department CMOs (Under
Secretaries) and the Service Vice Chiefs, in a personal
commitment to support our goals.
We have ensured that each Military Department has
programmed adequate resources to move forward with this
strategy.
We established a clear and meaningful linkage between
major business system investments and the goals of financial
auditability.
We are requiring Senior Executive performance
appraisals to include financial audit goals among their
criteria, including functional business areas that generate
business events with financial impact. This key initiative will
help establish audit requirements in business areas outside
comptroller.
We have begun efforts to establish a course-based
certification program for defense financial managers that will
permit us to emphasize education in key areas including
auditability.
We are assembling teams within each Military
Department that will be tasked with improving financial
controls.
We have maintained a close working relationship with
key stakeholders and oversight bodies, including GAO and the
Department's Inspector General.
While we have made or are making many process changes, we also
recognize that we must demonstrate specific progress to reassure
ourselves, and Congress, that we are actually moving toward auditable
financial statements. To that end, we launched an audit of the Marine
Corps' Statement of Budgetary Resources. If successful, this would be
the first time that any Military Service has completed an audit of a
financial statement. We have already learned a great deal from this
effort, and we believe that it will lead to a positive audit opinion.
We are also undertaking a number of other efforts to validate and
demonstrate progress. In May of this year we began a DOD-wide
examination and validation of our funds control and distribution
process (known in audit terms as ``appropriations received'') by a
public accounting firm. Periodic validation of appropriations received
will demonstrate to Congress that we are controlling our funds
carefully and in ways that ensure we comply with the laws you enact. In
June we began a public accounting firm validation of the Army's
organizations and bases that have implemented the GFEBS business
environment, a key effort to ensure that this new system is being used
in a manner that is auditable. In July we began a public accounting
firm validation of the Air Force's processes and controls to reconcile
their accounts with Treasury. This ``checkbook reconciliation'' is a
key building block to auditable financial statements. By the end of
this calendar year we expect to begin several other validation efforts
including validations of the counts and locations of large portions of
our military equipment.
CONCLUSION
In sum, we recognize the challenges associated with improving
financial information and achieving audit readiness at DOD. To meet
that challenge, we have developed a workable and promising partnership
between the CFO and DCMO communities that will help with
implementation. We have also implemented a new, focused approach that
includes near-term goals, in addition to the long-term goal of
achieving auditable statements by 2017.
As we mentioned at the outset of this statement, we are also
currently reviewing plans for financial management improvement at the
request of Secretary Panetta. We will report back to him and solicit
his guidance about future initiatives.
We would conclude by emphasizing that we are personally committed
to this effort as part of our overall commitment to providing the
financial resources and business operations necessary to meet our
national security objectives.
Senator McCaskill. Thank you very much, Secretary Hale.
Secretary--is it Matiella?
Ms. Matiella. Matiella.
Senator McCaskill. Secretary Matiella.
STATEMENT OF HON. MARY SALLY MATIELLA, ASSISTANT SECRETARY OF
THE ARMY, FINANCIAL MANAGEMENT AND COMPTROLLER
Ms. Matiella. Thank you.
Madam Chairman, Senator Ayotte, members of the
subcommittee, thank you for the opportunity to testify today
regarding financial management in the U.S. Army and our
commitment to achieving auditable financial statements.
Secretary McHugh, Chief of Staff Dempsey, Secretary
Westphal, our CMO, and all of our senior leaders recognize the
value and the importance of achieving the mandate of the
National Defense Authorization Act (NDAA) for Fiscal Year 2010,
which requires the Army to be audit-ready by September 30,
2017.
The Army employs hard-working soldiers and civilian
personnel across all functional areas, who are dedicated to
achieving audit readiness goals. These professionals are
transforming our financial and business systems to improve
financial management, to provide timely, accurate, and relevant
information for decisionmakers, and to reassure the American
taxpayers and Congress that the Army is a trustworthy steward
of public funds.
I am confident that we will be audit ready by September 30,
2017, because we have a sound and resourced financial
improvement plan, which conforms to DOD's FIAR criteria. We
have a solid ERP strategy guiding our business systems
development and deployment, and we have effective governance
and oversight ensuring accountability.
Our financial improvement plan is fully resourced, contains
detailed corrective actions and milestones, incorporates
lessons learned from the Army Corps of Engineers audit and the
Marine Corps audit, and identifies the organizations
responsible for corrective actions. Further, the plan requires
significant evaluation and testing to ensure internal controls
vital to the audit readiness and ensures that the internal
controls are in place and operating effectively.
To ensure that we are audit ready by September 30, 2017,
our improvement plan calls for four audit examinations each
year from fiscal year 2011 to fiscal year 2014. These
examinations culminate with an assertion of audit readiness of
the Army's statement of budgetary resources in fiscal year
2015.
These four audit examinations ensure that our financial
management practices and corrective actions pass audit
scrutiny. To ensure audit readiness is sustained, governance
and oversight are being provided by the auditors' senior
leaders.
Additionally, management personnel across all business
functions are being held accountable for achieving audit
readiness milestones. This accountability is included in their
fiscal year 2012 performance plans.
In summary, execution of our financial improvement plan and
our ERP strategy, combined with our senior-level governance and
oversight, enable the Army to be audit-ready by September 30,
2017.
I am personally committed to meeting our national security
objectives and mandates of the law requiring auditability. I
will continue to collaborate with the members of this
committee, your counterparts in the House of Representatives,
the GAO, Comptroller Hale, and DCMO McGrath to ensure the
continued improvement of the Army's business environment.
I look forward to your questions.
[The prepared statement of Ms. Matiella follows:]
Prepared Statement by Dr. Mary Sally Matiella
Madam Chairman, Senator Ayotte, and members of the subcommittee,
thank you for an opportunity to testify today regarding financial
management in the U.S. Army, my assessment of Army's progress toward
achieving auditable financial statements, the implementation of Army
enterprise resource planning systems, and our ongoing efforts to
improve financial management operations.
I share Mr. Hale's belief regarding the importance of audit
readiness. With Secretary McHugh's support, the Army intends to achieve
the milestones required by section 1003 of the National Defense
Authorization Act (NDAA) for Fiscal Year 2010: that is, be audit ready
not later than September 30, 2017. The emphasis on audit readiness
underscores the transformation in financial management across the Army
enterprise. The Army employs extremely hard working individuals across
all functional areas, both military and civilian, committed to
supporting the soldiers executing their mission and defending our
country. However, the improvements we are implementing will require our
dedicated soldiers and civilians to execute their business differently.
Our financial and business systems, processes, controls and training
are all keyed to improved financial management and will result in
timely, accurate, and relevant information for decisionmakers.
Our enterprise resource planning systems are in various stages of
deployment and include a new transaction-driven, compliant general
ledger for our general fund, a compliant general ledger for our working
capital fund, a tactical supply system and an integrated pay and
personnel system. As these systems are being implemented, legacy
systems are being drawn down. Our financial managers and business
process owners will employ compliant systems operating with associated
internal controls as a part of new business processes, which creates a
sustainable business environment when coupled with the ongoing
training.
We are following the Department's Financial Improvement and Audit
Readiness (FIAR) guidance by executing a detailed, fully resourced
Financial Improvement Plan (FIP) which provides detailed corrective
actions, associated milestone schedule, and identifies organizations
responsible for corrective actions. Our FIP tracks multiple elements
including implementation and stabilization of the Army's Enterprise
Resource Planning (ERP) systems, testing of internal controls and
implementation of corrective actions where controls are not operating
effectively, and the execution of multiple audit examinations conducted
by Independent Public Accountants (IPAs) to ensure corrective actions
will withstand audit scrutiny. Additionally, our FIP incorporates
lessons learned from the Army Corps of Engineers' successful audit, and
the current audit activity with the U.S. Marine Corps. To ensure we
remain on track, all Army senior executives will be held accountable in
their fiscal year 2012 performance plans for meeting specific audit
readiness milestone requirements.
Our major mid-term goals are to assert audit readiness on the
General Fund Statement of Budgetary Resources at the end of fiscal year
2015 and to verify the existence and completeness of mission critical
assets by the third quarter of fiscal year 2015. These mid-term
milestones support requirements established by Comptroller Hale and the
NDAA for Fiscal Year 2010 to focus audit readiness activities on
improving the information most useful to the department's managers such
as budgetary information reflected in the Statement of Budgetary
Resources and the existence and completeness of mission critical
assets.
To ensure we achieve these mid-term milestones, we have established
several interim milestones in our FIP. For example the Army asserted
audit readiness for all general fund appropriations received, covering
about $232 billion fiscal year 2010 appropriations. The Army's entire
appropriations received is under audit examination by an IPA. The audit
will determine if the Army has the appropriate controls and
documentation to properly record and report appropriations received and
distributed throughout all Army commands. Appropriations received
represents a significant interim milestone covering a substantial
reporting element on the Army's financial statements.
Another example of our interim milestones is a second audit
examination currently in process by an IPA of multiple business
activities conducted at Army Headquarters and several field sites
operating the Army's financial management ERP system, the General Fund
Enterprise Business System (GFEBS). This is the first of four interim
audit examinations planned between now and fiscal year 2015 to ensure
our management controls, business processes and documentation, as
established in the objective ERP environment supported by GFEBS, are
capable of meeting the rigors of a financial statement audit.
Collectively, the appropriations received audit, and the interim audit
examinations of the ERP environment will enable us to achieve our mid-
term objective to assert audit readiness of the Army's Statement of
Budgetary Resources by fiscal year 2015, and to assert audit readiness
of all financial statements by September 30, 2107.
In addition to audit examinations conducted by IPAs, we are also
mapping all our end-to-end business processes, identifying key controls
within each business process, and executing discovery and evaluation
activities to ensure controls are properly established and operating
effectively. Our discovery and evaluation efforts are led by my audit
readiness staff with support provided by the Army Audit Agency and the
Army's Internal Review and Audit Compliance network. Our discovery and
evaluation efforts comply with the Department's FIAR criteria, and
requirements established by Office of Management and Budget Circular A-
123 Appendix A. The discovery and evaluation efforts enable us to
ensure all business activity within the Army is conducted in a
compliant manner, and to isolate non conforming activity for corrective
actions. Follow-up audit by the Army Audit Agency and reviews by our
Internal Review and Audit Compliance personnel ensure corrective
actions are properly implemented.
This strategy enables us to make adjustments to our approach by the
early detection and correction of control and process deficiencies. We
have several interim milestones that will provide us with appropriate
information on our progress for meeting both the 2015 and 2017 goals.
In fact, we have already started to achieve some important milestones
that will pave the way for full financial statement audit readiness by
September 30, 2017. Army will engage the Department of Defense (DOD)
Inspector General in fiscal year 2014 to conduct an audit of the
existence and completeness of mission critical assets, which includes
nearly 700,000 general equipment, military equipment, and real property
end items, as well as several million missiles and ammunition assets.
We have already completed an existence and completeness assertion of 97
percent of our aviation assets, which accounts for 17 percent of the
Army's military equipment line items, and have expanded our audit
readiness work to cover all mission critical assets across the Army.
The Army FIP focuses on correcting internal control weaknesses
throughout the Army's business processes and business systems. The plan
includes corrective actions, milestones and performance measures, and
links the replacement of non-standard, non-compliant business
information systems with implementation of the Army's Enterprise
Resource Planning systems. Establishing and maintaining an auditable
organization requires executing standardized business processes and
systems, as well as complying with Federal accounting standards and the
DOD business enterprise architecture. By linking the FIP with the
Army's Enterprise Resource Planning Strategy, we are able to ensure
business system development and modernization is synchronized with
audit readiness requirements.
Since the Army's Enterprise Resource Planning systems are vital to
achieving and sustaining audit readiness, we are conducting internal
assessments of our business systems using the Government Accountability
Office (GAO) Financial Information Systems Control Audit Manual
(FISCAM). Our business system assessment is informed by the Single Army
Financial Enterprise architecture which provides all business system
components and processes. The FISCAM provides the standards against
which an IPA will conduct a financial statement audit.
As an interim milestone, we plan to complete and document our
internal assessment of the GFEBS against FISCAM standards by December
2011, and conduct an audit examination by an IPA in fiscal year 2012.
The results our fiscal year 2011 internal assessment and the fiscal
year 2012 follow-up systems audit will provide assurance that the GFEBS
is able to fully support the Army's audit readiness goals, well in
advance of our fiscal year 2015 Statement of Budgetary Resources
assertion. In the fall of 2011, we will begin similar FISCAM
preparation work, using our Single Army Financial Enterprise
Architecture as a guide, to ensure all business systems supporting the
financial enterprise, including the Army's Enterprise Resource Planning
systems are able to support the Army's audit readiness goals.
Since February 2010, we have experienced successes and achieved
milestones never accomplished previously. For example, GFEBS has been
fielded to over 34,000 users worldwide and is substantially compliant
with the Federal Financial Managers' Integrity Act. We have made
several assertions in the past 9 months and have IPAs currently
conducting two audits. In addition, three of our four Enterprise
Resource Planning systems are in deployment providing the Army for the
first time a standard, transaction driven general ledger recording and
reporting capability enabling auditors to track balances from the
financial statements to the detailed transactions supporting these
balances. Much of this success can be attributed to the 2 years of
consistent Army and DOD leader engagement, the Department's focus and
sound audit readiness guidance, and the support provided by Congress.
I am encouraged by preliminary results of the GAO's current audit
of the Department's financial improvement efforts. Results indicate the
Department has a solid methodology as established by criteria of the
FIAR framework. We are implementing the FIAR methodology in our FIP by
taking a controls-based audit readiness approach focused on
establishing and sustaining audit readiness by identifying risks,
mapping them to the key control objectives established by the GAO
Financial Audit Manual and FIAR Guidance, and implementing effective
controls throughout the business environment. In addition, we are
automating as many controls as possible within the Enterprise Resource
Planning systems to minimize manual controls and reduce risks that
exist within business processes.
Our strategy is focused on building the internal structure to
sustain audit readiness and realize the benefits of an improved and
controlled business environment. This corporate knowledge begins with
top-down leadership engagement and accountability. The Army recognizes
that audit readiness requires engagement throughout the organization
and the Army is the first Service to take the bold step holding all
Senior Executive Service personnel--not just those in the financial
management community--accountable for achieving audit readiness
milestones. On May 26, 2011, I established assessment criteria against
which all Army Senior Executive personnel will be held accountable in
fiscal year 2012 performance plans for achieving audit readiness
milestones.
I am confident we are executing a sound plan that will achieve the
NDAA 2010 mandate. I do, however, recognize we have many hard
challenges ahead and areas for improvement. The feedback we are
receiving from our discovery and evaluation efforts, IPA Audit
Examinations, and lessons from U.S. Army Corps of Engineers and U.S.
Marine Corps audits are all helpful to forming and shaping our audit
readiness efforts. We will continue to leverage these resources as we
move forward in the execution of our FIP.
In summary, I recognize the challenges associated with improving
financial information and achieving audit readiness within Army.
However, we are making great progress because of the commitment from
senior Army leaders and business process owners. I am personally
committed to this effort to meet our national security objectives and
the mandates of the law. I look forward to working with the members of
this committee, your counterparts in the House of Representatives, GAO,
and Comptroller Hale to ensure the continued improvement of the Army's
business environment.
Senator McCaskill. Thank you.
Secretary Commons.
STATEMENT OF HON. GLADYS J. COMMONS, ASSISTANT SECRETARY OF THE
NAVY, FINANCIAL MANAGEMENT AND COMPTROLLER
Ms. Commons. Madam Chairman, Senator Ayotte, Senator
Begich, thank you for the opportunity to discuss the Navy's
efforts to achieve financial audit readiness.
The Navy is fully committed to achieving financial
auditability, and our senior leaders have provided the
resources to do so. We are moving forward.
As Secretary Hale noted, the Marine Corps is in the second
year of audit of the statement of budgetary resources. We hope
to have positive results from that audit by the end of the
year.
As also noted, the Navy is currently undergoing examination
by a private firm of our appropriations received process, and
we should have those results in August.
The DOD IG is currently examining the completeness and
existence of high-value military equipment--that is, our ships,
ballistic missiles, and satellites--to be followed by an
examination of the existence and completeness of our aircraft
and ordnance inventory.
We have learned many lessons from the Marine Corps audit,
and we have incorporated those lessons into our overall Navy
financial improvement plan. We are also sharing these lessons
with the other Services. They include from the very complex of
ensuring the accuracy of our beginning balances to the simple--
maintenance of our supporting documentation and separation of
duties.
We are working with our service providers to ensure we all
understand what must be done and who is responsible. We have
reached across our own aisles to assign responsibility to our
business process owners, such as our human resource
organizations and our acquisition organizations. Beginning in
October, every senior executive responsible for executing our
business processes will have an audit readiness objective in
his or her performance plan.
We are also engaging our general and flag officers through
the Vice Chief of Naval Operations and the Assistant Commandant
of the Marine Corps. In August, we will begin training our new
general and flag officers specifically on their responsibility
as they relate to auditability.
Achieving auditability is challenging, and there is much
work to be done. We are committed to this effort and we are
making progress.
Thank you for your interest and support of our efforts. I
will be pleased to answer any questions you might have later.
[The prepared statement of Ms. Commons follows:]
Prepared Statement by Hon. Gladys J. Commons
Chairman McCaskill, Senator Ayotte, members of the subcommittee,
thank you for the opportunity to discuss the Department of the Navy's
efforts to achieve financial audit readiness. Achieving financial
auditability is one of my highest priorities and I am personally
committed to this objective. The top leaders in the Department,
Secretary Mabus, Under Secretary Work, as well as the Chief of Naval
Operations, Admiral Roughead, and General Amos, the Commandant of the
Marine Corps, are all also committed to our drive to auditability.
Indeed, the Department has demonstrated through performance that we
are aggressively moving forward. The Marine Corps is in its second year
of audit on its Statement of Budgetary Resources. Our goal is to attain
an opinion later this year from the Department of Defense (DOD)
Inspector General and the private firm conducting the engagement. This
effort has been a significant first-time challenge for us, but the
marines have risen admirably to the test, as they always do. This audit
has been invaluable because of the lessons we've learned. We have
incorporated those lessons into our larger Department of the Navy
financial improvement plan and are sharing them with the other Military
Departments.
The Department of the Navy is currently undergoing an examination
by an outside auditor of its Appropriation Received process; and the
DOD Inspector General is conducting an examination on the existence and
Completeness of high-value military equipment, including ships,
ballistic missiles, and satellites. We also believe that we are ready
for an examination of the existence and completeness of our aircraft
and ordnance.
In addition to supporting these ongoing audits, we continue to
identify the improvements to business processes and systems needed to
support an audit of the entire Department's Statement of Budgetary
Resources. We know we must comply comprehensively with accounting and
auditing standards, just as all financial entities, public or private,
are required to do; however, our systems and processes are not yet
designed to do so. Internal controls in most areas must be
strengthened. Our audit readiness team has refined its detailed plan
for audit readiness, based on the extensive lessons we've learned from
our Marine Corps audit and from our initial assessments of the
auditability of our business processes.
One current focus is bolstering our collaboration with our service
providers, particularly the Defense Finance and Accounting Service
(DFAS). We know that we must develop several essential capabilities
before we can undergo an audit, including reconciling our cash balance
with Treasury and tracing transactions from their orgination through
the financial statements. Extensive cooperation with DFAS will be
required for success in these areas. We have their commitment.
In addition to changing business processes, we need to improve
controls in supporting business systems. Navy's Enterprise Resource
Planning (ERP) system will make a significant contribution to our
auditability efforts. Navy ERP will enhance these efforts because it
establishes a stronger, embedded internal control framework and helps
standardize business processes for a sustainably auditable environment.
Implementation of Navy ERP continues space and according to schedule.
As a final point, I'd like to reiterate our leadership's commitment
to audit readiness. We continue to widen the circle of accountability.
Beginning next fiscal year, every senior executive responsible for
executing our business processes will have an audit readiness objective
in his or her performance plan. These frontline leaders will help the
Department transform its business processes and orient its business
culture toward auditability. In addition, we continue to have the
commitment of our leadership to resource these efforts adequately now
and into the future.
I'll be pleased to answer any of your questions at the appropriate
time.
Senator McCaskill. Thank you very much.
Secretary Morin.
STATEMENT OF HON. JAMIE M. MORIN, ASSISTANT SECRETARY OF THE
AIR FORCE, FINANCIAL MANAGEMENT AND COMPTROLLER
Mr. Morin. Thank you very much, Madam Chair, Ranking
Member.
It is a pleasure, as always, to have a chance to come
before this committee and the subcommittee. It is a committee I
had a lot of chances to work with when I spent 6 years on the
staff in the Senate.
If I may, I would like to just summarize the written
testimony that I prepared for the committee and have the
statement entered in the record.
When I came before the Senate Armed Services Committee 2
years ago as a nominee, I accepted a charge from Senator McCain
that for the Air Force, business-as-usual would not be
acceptable when it came to the audit readiness effort. That is
a charge I have taken to heart and I think the Air Force has
stepped forward aggressively on over the last couple of years.
Air Force leadership simply will not and cannot accept doing
business as usual if we expect to get to audit readiness by the
statutory deadline in 2017.
As I promised at that confirmation hearing, I have been a
very strong advocate for Under Secretary Hale's effort to
really focus our FIAR plan on the information that matters to
managers. I said at the time and I agree now that that is a
good idea because it builds a positive feedback loop, where the
people charged with leading and running DOD on a day-to-day
basis see the practical results of the FIAR effort.
They get the better information they need to manage better,
and therefore, they are more likely to seek to invest more in
getting us to that statutory timeline. It gives the leaders the
information they need in order to maximize the value we get out
of each taxpayer dollar.
I think this new focus really has delivered in terms of
creating stronger managerial incentives, and it has raised the
profile of audit readiness across the Air Force. Senator
Ayotte's point about auditability as a means to an end of good
stewardship is, I think, right on target, and that mindset is
really taking hold across the Air Force.
Like my colleagues, I am pleased to report that the Air
Force has made some very good and important progress on some of
our key interim deliverables over the last year or 2. Some of
the wins include our assertions of audit readiness on
appropriations received and distributed; our Funds Balance with
Treasury reconciliation process, which Mr. Hale mentioned.
That is a critical challenge, and sort of balancing our
checkbook with Treasury, it is over a million transactions a
month. We are matching up 99.99 percent of them, which is an
essential enabler for our broader audit readiness effort.
The existence and completeness of our entire military
equipment portfolio. We are also moving onto a range of
operating materials and supplies, things like our cruise
missiles and aerial targets and several other items there.
The progress that has been made is a direct result of the
exceptional commitment from our CMO, Under Secretary Conaton,
and the Air Force senior leadership. They have increased the
resources to this--applied to this effort every year, and they
have applied the right level of management attention to focus
the team on the progress.
Just 2 months ago, Under Secretary Conaton and the Vice
Chief of Staff for the Air Force, General Breedlove, wrote to
all of our major commands underscoring, first, the overall
importance of the FIAR and how it plays into Air Force
efficiency efforts; but also charging each of those commands
with creating the right incentives in the performance plans of
their senior leaders to focus the organization not just at a
headquarters level, but down to the field on the financial
improvement effort.
But while we have made great progress on some of these
interim deliverables, we do still have a long way to go to meet
the 2017 deadline. Our ability to achieve audit readiness
depends in part on our ability to field our ERPs. These systems
are replacing Vietnam-era bookkeeping systems that are not
compliant with any of the key requirements that are needed to
get to audit readiness.
While ERPs are not a panacea and the fielding of them has
not been without challenges, there is no alternative to
modernizing Air Force financial management systems. Whether it
is ERP or something else, we have to modernize those systems if
we are going to get to audit readiness.
In fielding our ERPs, we have benefited greatly in the Air
Force from being a little bit behind the other Services. We
have had an opportunity to observe their deployments, observe
their fielding, and learned quite a few lessons.
So, for example, we have had a heavy focus on data cleanup
and data integrity efforts and migrating the historical data
over. We continue to push forward, consistent with guidance
from the Office of Management and Budget (OMB) and others, to
focus on fielding discrete increments and smaller pieces of
these ERPs in order to improve accountability, avoid big bang
approaches.
Successful deployment of these systems, though, will depend
on execution and our ability to work these systems through an
acquisition and fielding timeline that is--will strain the
system. If we do DOD acquisition business as usual, we will not
be able to successfully field these systems.
It is for those reasons that I do see moderate risk in the
Air Force's ability to meet that fielding timeline. As a
result, we are working to hedge against that risk and explore
interim solutions that would help us achieve auditability in a
more patchwork way if the systems do not deliver on the
schedule that is currently there.
Again, this is a belt-and-suspenders approach in many
cases. But having observed the DOD acquisition of IT systems
over quite a few years, while we have a schedule in front of us
that I have reasonable confidence in, I know that the
historical record of achievement of planned schedules on IT
acquisitions is not good, and I feel a need to hedge against
that.
But I do want to be very clear. We have a comprehensive
plan toward our business systems modernization and toward our
business process improvement that is carefully crafted to get
us toward an audit-ready environment by 2017. We are pressing
forward with a very strong leadership commitment to achieving
that deadline.
With that, I am ready for the committee's questions and the
testimony of the other witnesses.
[The prepared statement of Mr. Morin follows:]
Prepared Statement Hon. Jamie M. Morin
Thank you for the opportunity to brief the subcommittee on your Air
Force's efforts and progress towards financial improvement and audit
readiness. We recognize that auditable financials will be useful tools
helping the Air Force produce the maximum combat capability from each
taxpayer dollar invested. The Air Force is implementing the Department
of Defense (DOD) Financial Improvement and Audit Readiness (FIAR)
guidance through a detailed Financial Improvement Plan (FIP) which
includes discovery of problem areas, a set of milestones and interim
deliverable, and assignment of corrective actions to accountable
parties.
Air Force leadership is engaged and committed to our audit
readiness efforts. This engagement extends to the highest levels--for
instance, both uniformed and civilian. In May, the Under Secretary of
the Air Force, Ms. Conaton, and the Air Force Vice Chief of Staff,
General Breedlove wrote to the leadership of all our Air Force Major
Commands emphasizing the importance of audit readiness.
A key focus in Air Force audit readiness efforts is individual
accountability. Toward that end, the Air Force has led the way
requiring senior executives to include audit readiness objectives in
their annual performance plans. These goals must be concrete,
measurable and individually tailored to ensure accountability. Members
of my team, the Air Force Deputy Chief Management Officer and a small
number of other key leaders already have these goals in their
performance plans. We continue to expand this effort to include
executives in acquisition, logistics, and personnel.
Currently, the end date on Air Force's audit readiness schedule
comes later than those of the other Services. This is due in part to
our reliance on our Enterprise Resource Planning (ERP) systems as part
of the solution to several key audit readiness challenges. Over the
last 2 years, we have aimed to accelerate our progress by seeking
additional funding in our fiscal year 2012 budget request and
evaluating legacy systems for audit. Additionally, Air Force leadership
placed heavy emphasis on identifying opportunities for interim
progress, such as accelerating asserting Existence and Completeness for
Medical Equipment and Munitions. Air Force financial managers and other
responsible officials are engaging with the Office of the Secretary of
Defense (OSD) and the other Services to ensure we benefit from the
lessons learned by other organizations in their own audit readiness
efforts.
As a result of strong leadership commitment and the changes we have
made in the last year, we have made significant progress in Under
Secretary Hale's prioritized audit readiness areas--Budgetary
Information and Mission Critical Assets.
In September 2010, the Air Force asserted audit readiness on
Appropriations received and distributed to our major commands. This
assertion covers $165 billion or 94 percent of new budget authority.
This assertion provides taxpayers the confidence we have control of
appropriations received. In April 2011, KPMG, an Independent Public
Accounting firm, was hired to express an opinion on our assertion and
we expect completion of this engagement in late August 2011.
In December 2010, we asserted audit readiness for our Fund Balance
with Treasury (FBwT) Reconciliation. This is analogous to balancing the
Air Force checkbook, albeit one with approximately 1.1 million
transactions per month. Since April 2010, we have consistently exceeded
the OSD goal of reconciling 98 percent and in June 2011, we reconciled
99.99 percent of the dollar value. Our unmatched disbursements declined
from $1.3 billion to $800 thousand since implementing our FBwT
reconciliation tool and process.
We also asserted audit readiness for the existence and completeness
of Military Equipment in December 2010. This includes satellites,
aircraft, remotely piloted vehicles, aircraft pods, and
intercontinental ballistic missiles. With a Net Book Value of $103
billion, Military Equipment represents approximately one third of our
total assets. Finally, we asserted audit readiness on the existence and
completeness of our cruise missiles, aerial targets, and drones in June
2011. Testing will likely reveal a few areas for further cleanup, but
this is a major accomplishment.
Standard business rules and data structures defined in
comprehensive business architecture are critical to establishing an
audit ready environment. The Air Force Chief Management Officer (CMO)
is responsible for ensuring comprehensive business enterprise
architecture is adopted across the enterprise. The CMO's office
exercises oversight of the functional communities' adoption of this
architecture through biweekly meetings with representatives from all
communities. This enterprise senior working group also reviews systems
investments exceeding $1 million ensuring appropriate consideration has
been given to business process reengineering as an alternative to
system investments.
The Air Force is committed to continuous progress toward audit
readiness. For several years, we have deferred enhancements to our
legacy systems while we developed more robust IT Solutions, including
Enterprise Resource Planning Systems (ERPs) such as Defense Enterprise
Accounting Management System (DEAMS), Expeditionary Combat Support
System (ECSS), Air Force Integrated Personnel and Pay System (AF-IPPS),
and NexGen IT for our real estate and facilities. These ERPs were
designed to replace numerous subsidiary systems, reduce the number of
interfaces and eliminate redundant data entry, while providing an
environment for end-to-end business processes. These systems serve as
the foundation for our audit readiness which means that delays in
deploying these ERPs will impact our ability to successfully complete
an audit. We coordinated our FIAR plan to achieve audit readiness with
the deployment of these ERPs.
For example, DEAMS will serve as the General Ledger for our General
Fund while ECSS serves as the General Ledger for our Working Capital
Fund and the Accountable Property System of Record for our Military
Equipment, Operating Materials and Supplies, and Inventory. AF-IPPS
integrates our military personnel and pay processes; recording and
managing an annual payroll in excess of $33 billion. NexGen IT is our
target Accountable Property System of Record for Real Property handling
$32 billion or 10 percent of total assets. DEAMS and ECSS have already
deployed initial capabilities and are operating at Scott and Hanscom
AFB respectively. We are close to completing the requirements
definition process for AF-IPPS, including the ``clean-audit''
standards--and will release an RFP to industry in the next 8 weeks for
bids on a technical solution. NexGen IT is our target Accountable
Property System of Record for Real Property handling $32 billion or 10
percent of total assets.
These systems clearly will have a material impact on our statements
and any delays in their deployment will impact our audit readiness
goals. We are working with OSD and the Office of Management and Budget
to mitigate these risks and are exploring opportunities to accelerate
the acquisition process using a new approach--the Business Capability
Lifecycle model rather than the lengthier process outlined in DOD
Instruction 5000.
Successfully implementing a more tailored approached to acquisition
that works in the fast moving IT environment is key to achieving our
audit schedule. I am also concerned about the cost and capabilities of
the ERPs and am looking at alternatives for deploying several smaller
discrete software releases, regularly competed to incentivize
contractors assisting us. We have also encountered integration
challenges with the ERPs within our current information technology
architecture. While we have taken major steps to get the Air Force ERP
systems on track, and I've seen real progress with DEAMS in its initial
deployment, there is very little flex in the implementation schedule.
Therefore, I see a moderate risk in the Air Force's overall audit
readiness schedule. To hedge against the risks either our acquisition
process or our systems infrastructure will fall short, I have directed
an exploration of interim solutions to achieve auditability by the 2017
deadline.
During fiscal year 2012 we have several important milestones to
achieve. We will do an early assessment of DEAMS and ECSS to validate
they are configured with the appropriate controls and data to support
an audit. I fully expect to find some issues through this review which
we will correct as we work towards full deployment, but that is a
normal part of the process addressing system weaknesses. Another
important fiscal year 2012 milestone is our audit assertion of the
Space Based Infrared System program. Because a program does not
typically create stand alone financial statements that are audited, we
are working with DFAS to establish the parameters of the audit, but
anticipate it covering at least 90 percent of the SIBRS Procurement and
R&D expenditures between fiscal year 2008 and fiscal year 2010. Our
team had been working to assert existence and completeness for aircraft
spare engines and missile motors in June 2011. However, we did not feel
that the testing results were sufficient to support audit readiness and
are withholding the assertions while additional corrective actions are
implemented. We believe that the corrective actions will allow us to
submit both assertions during the first quarter of fiscal year 2012 and
begin an audit by the third quarter of fiscal year 2012.
The slippage in the assertion on space engines and missile motors
underlines the importance of incremental progress and setting stretch
goals. We do not expect a perfect batting average the first time
through and if we built a process to deliver perfection the first time,
it would not be timely. We develop the FIP and schedule primarily at
Headquarters based on the best available information, but there are
always unknowns due to the Air Force's decentralized operating
structure. Our people conduct business at 191 bases across the world
organized in 11 major commands. Many processes have evolved differently
across our organization, meaning that implementing the required
corrective actions sometimes takes longer than expected.
As we work to achieve the 2017 deadline, Air Force leadership is
setting numerous stretch goals and setting ambitious goals means
occasionally missing them. On the other hand, we have also been able to
accelerate some assertions based on better than expected results. We
are also striving to strike the right balance between applying
resources to robust planning and testing of progress versus hands-on
fixing of weaknesses. Both are important. In keeping with best
practices, we will rely on the DOD Inspector General or hire an
independent public accounting firm to opine on each of our assertions.
It is important to note that there are three or more phases of testing
enroute to a clean audit--internal Air Force review prior to assertion,
external review of the assertion itself, and then the actual audit of
Air Force financials.
Thank you for the committee's interest and focus on this important
effort. The continued involvement of Congress, OSD, and the Government
Accountability Office as well as the very strong commitment of today's
Air Force leadership is crucial to ensuring continued progress towards
an unqualified audit opinion no later than 2017.
Senator McCaskill. Thank you, Secretary Morin.
Mr. Khan.
STATEMENT OF ASIF A. KHAN, DIRECTOR, FINANCIAL MANAGEMENT AND
ASSURANCE, GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Khan. Thank you.
Madam Chairman and members of the subcommittee, good
afternoon. It is a pleasure to be here today to discuss the
status of DOD financial management improvement and business
transformation efforts.
At the outset, I would like to thank the subcommittee for
holding this hearing and acknowledge the importance of focused
attention on the corrective actions needed to meet difficult
challenges.
In my testimony today I will provide GAO's perspective on
the status of DOD financial management weaknesses and its
efforts to resolve them. In addition, I will also address the
challenges DOD continues to face in improving its financial
management operations. My testimony today is based on our prior
work at DOD.
Regarding the status, like, Madam Chairman, you had
mentioned, 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 financial
management weaknesses, none of the DOD components--including
the Army, Navy, or the Air Force--have been able to prepare
auditable financial statements.
DOD's past strategies for improving financial management
have generally been ineffective. But recent initiatives are
encouraging, specifically recent changes, as Mr. Hale laid out,
to the DOD's plan for FIAR plan, if implemented effectively,
could result in improved financial management and progress
toward our auditability. The Army, Navy, Air Force, and the
Defense Logistics Agency have key roles in implementing this
plan.
DOD faces many challenges in overcoming its longstanding
management weaknesses. I am going to highlight six of these
challenges, which very much resonate what you have mentioned in
your opening statements.
First, one of the toughest challenges in implementing the
FIAR plan is sustaining committed leadership. The DOD
Comptroller has expressed commitment to the FIAR plan, and he
has established a focused approach to achieve FIAR's long-term
goals. This is intended to help DOD achieve near-term successes
as well.
To succeed in the long-term, efforts to improve financial
management need to be cross-functional. DOD agencies and
offices that perform business functions--for example, weapon
system acquisitions and supply chain management--are highly
dependent on financial management.
However, within every administration and, of course,
between administrations, there are changes in senior
leadership. Therefore, it is paramount that the FIAR plan and
other current initiatives be institutionalized throughout DOD
at all levels.
Second, a competent financial management workforce with the
right knowledge and skills is needed to implement the FIAR
plan. Effective financial management requires a knowledgeable
and skilled workforce that includes individuals who are trained
as well and well-versed in Government accounting practices and
experienced information technology. Analyzing skill needs and
then building and retaining an appropriately skilled workforce
are needed to succeed in DOD's transformation efforts.
The third challenge is to assure accountability and
effective oversight to the improvement efforts. DOD has
established bodies responsible for governance and oversight of
the FIAR plan implementation. It will be critical for senior
leadership at each DOD component to ensure that oversight of
financial management improvement projects is effective and that
responsible officials are held accountable for progress.
Fourth, a well-defined business architecture is the fourth
challenge. For DOD, a key element of modernizing financial
management and business operations is the use of integrated
information systems with the capability of supporting the vast
and complex business operations that DOD has.
A well-defined enterprise architecture will be needed as
DOD's blueprint for modernizing its business systems. However,
DOD has yet to address previously identified issues associated
with both architecture and investment management.
The fifth challenge, like we have mentioned, is the ERP
systems. They are expected to form the core of business
information systems and DOD components. Their effective
implementation is essential to improving DOD financial
management and related business operations, and they will be
key to becoming auditable.
However, the components have largely been unable to
implement ERPs that deliver the needed capabilities and on
schedule and within budget. Effective business system
modernization across DOD is a key to achieving hundreds and
millions of dollars in annual savings.
Finally, weaknesses in DOD internal control over financial
management are pervasive and primary factor in DOD's ability to
become auditable. DOD needs a practical approach to
prioritizing actions to correct these weaknesses.
In closing, I am encouraged by the recent efforts and
commitments the DOD leaders have shown towards improving DOD's
financial management. However, DOD's ability to address these
six major challenges that I have highlighted today will be
critical to improving its financial management operations and
achieving auditability.
These challenges are significant. They deal with the very
basic building blocks of sound financial management. However,
it is absolutely critical at the same time that DOD continues
with its current efforts, commitments, and momentum going
forward.
Madam Chairman, this concludes my remarks. I will be happy
to answer questions you may have.
Thank you.
[The prepared statement of Mr. Khan follows:]
Prepared Statement by Asif A. Khan
Chairwoman McCaskill, Ranking Member Ayotte, and members of the
subcommittee:
It is a pleasure to be here today to discuss the status of the
Department of Defense's (DOD) efforts to improve its financial
management operations and achieve audit readiness. At the outset, I
would like to thank the Subcommittee for holding this hearing and to
acknowledge the important role of such hearings in the oversight of
DOD's financial management efforts.
DOD is one of the largest and most complex organizations in the
world. For fiscal year 2012, the budget requested for the department
was approximately $671 billion--$553 billion in discretionary budget
authority and $118 billion to support overseas contingency operations.
The fiscal year 2012 budget request also noted that DOD employed over 3
million military and civilian personnel--including Active and Reserve
servicemembers. DOD operations span a wide range of defense
organizations, including the Military Departments and their respective
major commands and functional activities, large defense agencies and
field activities, and various combatant and joint operational commands
that are responsible for military operations for specific geographic
regions or theaters of operation. To execute its operations, the
department performs interrelated and interdependent business functions,
including financial management, logistics management, health care
management, and procurement. To support its business functions, DOD has
reported that it relies on over 2,200 business systems,\1\ including
accounting, acquisition, logistics, and personnel systems.
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\1\ DOD excludes from its business systems those designated as
national security systems under section 2222(j) of title 10, U.S.C.
National security systems are intelligence systems, cryptologic
activities related to national security, military command and control
systems, and equipment that is an integral part of a weapon or weapons
system or is critical to the direct fulfillment of military or
intelligence missions.
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The department's sheer size and complexity contribute to the many
challenges DOD faces in resolving its pervasive, complex, and
longstanding financial management and related business operations and
systems problems. Numerous initiatives and efforts have been undertaken
by DOD and its components to improve the department's financial
management operations and to arrive at a point where the reliability of
its financial statements and related financial management information
would be sufficient to pass an audit with favorable (clean) audit
opinions. To date, DOD has not achieved effective financial management
capabilities or financial statement auditability.\2\
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\2\ DOD's auditors have reported material financial management
weaknesses in the following areas: (1) Financial Management Systems,
(2) Fund Balance with Treasury, (3) Accounts Receivable, (4) Inventory,
(5) Operating Materials and Supplies, (6) General Property, Plant, and
Equipment, (7) Government-Furnished Material and Contractor-Acquired
Material, (8) Accounts Payable, (9) Environmental Liabilities, (10)
Statement of Net Cost, (11) Intragovernmental Eliminations, (12) Other
Accounting Entries, and (13) Reconciliation of Net Cost of Operations
to Budget.
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Today, I will discuss the status of DOD's financial management
weaknesses, its efforts to resolve those weaknesses, and the challenges
DOD continues to face in its efforts to improve its financial
management operations. In addition, I will outline the status of the
department's efforts to implement its Enterprise Resource Planning
(ERP) systems,\3\ which represent a critical element of the
department's Financial Improvement and Audit Readiness (FIAR) strategy.
My statement today is based on our prior work related to the
department's FIAR plan \4\ and ERP implementation efforts.\5\ Our work
was conducted in accordance with generally accepted government auditing
standards and our previously published reports contain additional
details on the scope and methodology for those reviews. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.
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\3\ An ERP system uses commercial off-the-shelf software consisting
of multiple, integrated functional modules that perform a variety of
business related tasks such as general ledger accounting, payroll, and
supply chain management.
\4\ GAO, Financial Management: Achieving Financial Statement
Auditability in the Department of Defense, GAO-09-373 (Washington, DC:
May 6, 2009).
\5\ GAO, DOD Business Transformation: Improved Management and
Oversight of Business Modernization Efforts Needed, GAO-11-53
(Washington, DC: Oct. 7, 2010); Defense Logistics: Actions Needed to
Improve Implementation of the Army Logistics Modernization Program,
GAO-10-461 (Washington, DC: Apr. 30, 2010), DOD Business
Transformation: Air Force's Current Approach Increases Risk That Asset
Visibility Goals and Transformation Priorities Will Not Be Achieved,
GAO-08-866 (Washington, DC: Aug. 8, 2008), DOD Business Systems
Modernization: Important Management Controls Being Implemented on Major
Navy Program, but Improvements Needed in Key Areas, GAO-08-896
(Washington, DC: Sept. 8, 2008), and DOD Business Transformation: Lack
of an Integrated Strategy Puts the Army's Asset Visibility System
Investments at Risk, GAO-07-860 (Washington, DC: July 27, 2007).
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BACKGROUND
The department is facing near- and long-term internal fiscal
pressures as it attempts to balance competing demands to support
ongoing operations, rebuild readiness following extended military
operations, and manage increasing personnel and health care costs as
well as significant cost growth in its weapon systems programs. For
more than a decade, DOD has dominated GAO's list of Federal programs
and operations at high risk of being vulnerable to fraud, waste,
abuse.\6\ In fact, all of the DOD programs on GAO's High-Risk List
relate to business operations, including systems and processes related
to management of contracts, finances, supply chain, and support
infrastructure,\7\ as well as weapon systems acquisition. Longstanding
and pervasive weaknesses in DOD's financial management and related
business processes and systems have: (1) resulted in a lack of reliable
information needed to make sound decisions and report on the financial
status and cost of DOD activities to Congress and DOD decisionmakers;
(2) adversely impacted its operational efficiency and mission
performance in areas of major weapons system support and logistics; and
(3) left the department vulnerable to fraud, waste, and abuse.
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\6\ DOD bears responsibility, in whole or in part, for 14 of the 30
Federal programs or activities that GAO has identified as being at high
risk of waste, fraud, abuse, and mismanagement. The eight specific DOD
high-risk areas are: (1) approach to business transformation, (2)
business systems modernization, (3) contract management, (4) financial
management, (5) supply chain management, (6) support infrastructure
management, and (7) weapon systems acquisition. The seven
governmentwide high-risk areas that include DOD are: (1) disability
programs, (2) interagency contracting, (3) information systems and
critical infrastructure, (4) information sharing for homeland security,
(5) human capital, (6) real property, and (7) ensuring the effective
protection of technologies critical to U.S. national security
Interests.
\7\ Support infrastructure includes categories such as
installations, central logistics, the defense health program, and
central training.
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Because of the complexity and long-term nature of DOD's
transformation efforts, GAO has reported the need for a chief
management officer (CMO) position and a comprehensive, enterprisewide
business transformation plan. In May 2007, DOD designated the Deputy
Secretary of Defense as the CMO. In addition, the National Defense
Authorization Acts for Fiscal Years 2008 and 2009 contained provisions
that codified the CMO and Deputy CMO (DCMO) positions, required DOD to
develop a strategic management plan, and required the Secretaries of
the Military Departments to designate their under secretaries as CMOs
and to develop business transformation plans.
Overview of DOD's Accounting and Finance Activities
DOD financial managers are responsible for the functions of
budgeting, financing, accounting for transactions and events, and
reporting of financial and budgetary information. To maintain
accountability over the use of public funds, DOD must carry out
financial management functions such as recording, tracking, and
reporting its budgeted spending, actual spending, and the value of its
assets and liabilities. DOD relies on a complex network of
organizations and personnel to execute these functions. Also, its
financial managers must work closely with other departmental personnel
to ensure that transactions and events with financial consequences,
such as awarding and administering contracts, managing military and
civilian personnel, and authorizing employee travel, are properly
monitored, controlled, and reported, in part, to ensure that DOD does
not violate spending limitations established in legislation or other
legal provisions regarding the use of funds.
Before fiscal year 1991, the Military Services and Defense agencies
independently managed their finance and accounting operations.
According to DOD, these decentralized operations were highly
inefficient and failed to produce reliable information. On November 26,
1990, DOD created the Defense Finance and Accounting Service (DFAS) as
its accounting agency to consolidate, standardize, and integrate
finance and accounting requirements, functions, procedures, operations,
and systems. The Military Services and defense agencies pay for finance
and accounting services provided by DFAS using their operations and
maintenance appropriations. The Military Services continue to perform
certain finance and accounting activities at each military
installation. These activities vary by Military Service depending on
what the Services wanted to maintain in-house and the number of
personnel they were willing to transfer to DFAS. As DOD's accounting
agency, DFAS records these transactions in the accounting records,
prepares thousands of reports used by managers throughout DOD and by
Congress, and prepares DOD-wide and service-specific financial
statements. The Military Services play a vital role in that they
authorize the expenditure of funds and are the source of most of the
financial information that allows DFAS to make payroll and contractor
payments. The Military Services also have responsibility over all DOD
assets and the related information needed by DFAS to prepare annual
financial statements required under the Chief Financial Officers
Act.\8\
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\8\ Sec. 31 U.S.C. Sec. 3515(a),(c); PMB Bulletin No. 07-04, Audit
Requirements For Federal Agencies Statements, Appendix B (Sept. 2004).
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DOD accounting personnel are responsible for accounting for funds
received through congressional appropriations, the sale of goods and
services by working capital fund businesses, revenue generated through
nonappropriated fund activities, and the sales of military systems and
equipment to foreign governments or international organizations. DOD's
finance activities generally involve paying the salaries of its
employees, paying retirees and annuitants, reimbursing its employees
for travel-related expenses, paying contractors and vendors for goods
and services, and collecting debts owed to DOD. DOD defines its
accounting activities to include accumulating and recording operating
and capital expenses as well as appropriations, revenues, and other
receipts. According to DOD's fiscal year 2012 budget request, in fiscal
year 2010 DFAS
processed approximately 198 million payment-related
transactions and disbursed over $578 billion;
accounted for 1,129 Active DOD appropriation accounts;
and
processed more that 11 million commercial invoices.
PERVASIVE FINANCIAL MANAGEMENT PROBLEMS CONTINUE TO AFFECT THE
EFFICIENCY AND EFFECTIVENESS OF DOD OPERATIONS
DOD financial management was designated as a high-risk area by GAO
in 1995. Pervasive deficiencies in financial management processes,
systems, and controls, and the resulting lack of data reliability,
continue to impair management's ability to assess the resources needed
for DOD operations; track and control costs; ensure basic
accountability; anticipate future costs; measure performance; maintain
funds control; and reduce the risk of loss from fraud, waste, and
abuse.
Other business operations, including the high-risk areas of
contract management, supply chain management, support infrastructure
management, and weapon systems acquisition are directly impacted by the
problems in financial management. We have reported that continuing
weaknesses in these business operations result in billions of dollars
of wasted resources, reduced efficiency, ineffective performance, and
inadequate accountability. Examples of the pervasive weaknesses in the
department's business operations are highlighted below.
DOD invests billions of dollars to acquire weapon
systems, but it lacks the financial management processes and
capabilities it needs to track and report on the cost of weapon
systems in a reliable manner. We reported on this issue over 20
years ago,\9\ but the problems continue to persist. In July
2010, we reported \10\ that although DOD and the Military
Departments have efforts underway to begin addressing these
financial management weaknesses, problems continue to exist and
remediation and improvement efforts would require the support
of other business areas beyond the financial community before
they could be fully addressed.
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\9\ GAO, Financial Audit: Air Force Does Not Effectively Account
for Billions of Dollars of Resources, GAO/AFMD 90-23 (Washington, DC:
Feb. 23, 1990).
\10\ GAO, Department of Defense: Additional Actions Needed to
Improve Financial Management of Military Equipment, GAO-10-695
(Washington, DC July 26, 2010).
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DOD also requests billions of dollars each year to
maintain its weapon systems, but it has limited ability to
identify, aggregate, and use financial management information
for managing and controlling operating and support costs.
Operating and support costs can account for a significant
portion of a weapon system's total life-cycle costs, including
costs for repair parts, maintenance, and contract services. In
July 2010, we reported \11\ that the department lacked key
information needed to manage and reduce operating and support
costs for most of the weapon systems we reviewed \12\--
including cost estimates and historical data on actual
operating and support costs. For acquiring and maintaining
weapon systems, the lack of complete and reliable financial
information hampers DOD officials in analyzing the rate of cost
growth, identifying cost drivers, and developing plans for
managing and controlling these costs. Without timely, reliable,
and useful financial information on cost, DOD management lacks
information needed to accurately report on acquisition costs,
allocate resources to programs, or evaluate program
performance.
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\11\ GAO, Defense Management: DOD Needs Better Information and
Guidance to More Effectively Manage and Reduce Operating and Support
Costs of Major Weapon Systems, GAO-10-717 (Washington, DC: July 20,
2010).
\12\ GAO reviewed the following seven major aviation systems: the
Navy's F/A-18E/F; the Air Force's F-22A, B-1B, and F-15E; and the
Army's AH-64D, CH-47D, and UH-60L.
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In June 2010, we reported \13\ that the Army Budget
Office lacked an adequate funds control process to provide it
with ongoing assurance that obligations and expenditures do not
exceed funds available in the Military Personnel-Army (MPA)
appropriation. We found that an obligation of $200 million in
excess of available funds in the Army's military personnel
account violated the Antideficiency Act. The overobligation
likely stemmed, in part, from lack of communication between
Army Budget and program managers so that Army Budget's
accounting records reflected estimates instead of actual
amounts until it was too late to control the incurrence of
excessive obligations in violation of the act. Thus, at any
given time in the fiscal year, Army Budget did not know the
actual obligation and expenditure levels of the account. Army
Budget explained that it relies on estimated obligations--
despite the availability of actual data from program managers--
because of inadequate financial management systems. The lack of
adequate process and system controls to maintain effective
funds control impacted the Army's ability to prevent, identify,
correct, and report potential violations of the Antideficiency
Act.
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\13\ GAO, Department of the Army--The fiscal year 2008 Military
Personnel, Army Appropriation and the Antideficiency Act, B-318724
(Washington, DC: June 22, 2010).
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In our February 2011 report \14\ on the Defense
Centers of Excellence (DCOE), we found that DOD's TRICARE
Management Activity (TMA) had misclassified $102.7 million of
the nearly $112 million in DCOE advisory and assistance
contract obligations. The proper classification and recording
of costs are basic financial management functions that and are
also key in analyzing areas for potential future savings.
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\14\ GAO, Defense Health: Management Weaknesses at Defense Centers
of Excellence for Psychological Health and Traumatic Brain Injury
Require Attention, GAO-11-219 (Washington, DC: Feb. 28, 2011).
Without adequate financial management processes, systems, and
controls, DOD components are at risk of reporting inaccurate,
inconsistent, and unreliable data for financial reporting and
management decisionmaking and potentially exceeding authorized spending
limits. The lack of effective internal controls hinders management's
ability to have reasonable assurance that their allocated resources are
used effectively, properly, and in compliance with budget and
appropriations law.
DOD'S PAST STRATEGIES FOR IMPROVING FINANCIAL MANAGEMENT WERE
INEFFECTIVE BUT RECENT INITIATIVES ARE ENCOURAGING
Over the years, DOD has initiated several broadbased reform efforts
to address its longstanding financial management weaknesses. However,
as we have reported, those efforts did not achieve their intended
purpose of improving the department's financial management operations.
In 2005, the DOD Comptroller established the DOD FIAR Directorate to
develop, manage, and implement a strategic approach for addressing the
department's financial management weaknesses and for achieving
auditability, and to integrate those efforts with other improvement
activities, such as the department's business system modernization
efforts. In May 2009,\15\ we identified several concerns with the
adequacy of the FIAR plan as a strategic and management tool to resolve
DOD's financial management difficulties and thereby position the
department to be able to produce auditable financial statements.
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\15\ GAO, Financial Management: Achieving Financial Statement
Auditability in the Department of Defense, GAO-09-373 (Washington, DC:
May 6, 2009).
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Overall, since the issuance of the first FIAR plan in December
2005, improvement efforts have not resulted in the fundamental
transformation of operations necessary to resolve the department's
longstanding financial management deficiencies. However, DOD has made
significant improvements to the FIAR plan that, if implemented
effectively, could result in significant improvement in DOD's financial
management and progress toward auditability, but progress in taking
corrective actions and resolving deficiencies remains slow. While none
of the Military Services has obtained an unqualified (clean) audit
opinion, some DOD organizations, such as the Army Corps of Engineers,
DFAS, the Defense Contract Audit Agency, and the DOD Inspector General,
have achieved this goal. Moreover, some DOD components that have not
yet received clean audit opinions are beginning to reap the benefits of
strengthened controls and processes gained through ongoing efforts to
improve their financial management operations and reporting
capabilities. Lessons learned from the Marine Corps' Statement of
Budgetary Resources audit can provide a roadmap to help other
components better stage their audit readiness efforts by strengthening
their financial management processes to increase data reliability as
they develop action plans to become audit ready.
In August 2009, the DOD Comptroller sought to further focus efforts
of the department and components, in order to achieve certain short-
and long-term results, by giving priority to improving processes and
controls that support the financial information most often used to
manage the department. Accordingly, DOD revised its FIAR strategy and
methodology to focus on the DOD Comptroller's two priorities--budgetary
information and asset accountability. The first priority is to
strengthen processes, controls, and systems that produce DOD's
budgetary information and the department's Statements of Budgetary
Resources. The second priority is to improve the accuracy and
reliability of management information pertaining to the department's
mission-critical assets, including military equipment, real property,
and general equipment, and validating improvement through existence and
completeness testing. The DOD Comptroller directed the DOD components
participating in the FIAR plan--the departments of the Army, Navy, Air
Force and Defense Logistics Agency--to use a standard process and
aggressively modify their activities to support and emphasize
achievement of the priorities.
GAO supports DOD's current approach of focusing and prioritizing
efforts in order to achieve incremental progress in addressing
weaknesses and making progress toward audit readiness. Budgetary and
asset information is widely used by DOD managers at all levels, so its
reliability is vital to daily operations and management. DOD needs to
provide accountability over the existence and completeness of its
assets. Problems with asset accountability can further complicate
critical functions, such as planning for the current troop withdrawals.
In May 2010, DOD introduced a new phased approach that divides
progress toward achieving financial statement auditability into five
waves (or phases) of concerted improvement activities (see appendix I).
According to DOD, the components' implementation of the methodology
described in the 2010 FIAR plan is essential to the success of the
department's efforts to ultimately achieve full financial statement
auditability. To assist the components in their efforts, the FIAR
guidance, issued along with the revised plan, details the
implementation of the methodology with an emphasis on internal controls
and supporting documentation that recognizes both the challenge of
resolving the many internal control weaknesses and the fundamental
importance of establishing effective and efficient financial
management. The FIAR Guidance provides the process for the components
to follow, through their individual financial improvement plans (FIP),
in assessing processes, controls, and systems; identifying and
correcting weaknesses; assessing, validating, and sustaining corrective
actions; and achieving full auditability. The guidance directs the
components to identify responsible organizations and personnel and
resource requirements for improvement work. In developing their plans,
components use a standard template that comprises data fields aligned
to the methodology. The consistent application of a standard
methodology for assessing the components' current financial management
capabilities can help establish valid baselines against which to
measure, sustain, and report progress.
NUMEROUS CHALLENGES MUST BE ADDRESSED IN ORDER FOR DOD TO SUCCESSFULLY
REFORM FINANCIAL MANAGEMENT
Improving the department's financial management operations and
thereby providing DOD management and Congress more accurate and
reliable information on the results of its business operations will not
be an easy task. It is critical that the current initiatives being led
by the DOD Deputy Chief Management Officer and the DOD Comptroller be
continued and provided with sufficient resources and ongoing monitoring
in the future. Absent continued momentum and necessary future
investments, the current initiatives may falter, similar to previous
efforts. Below are some of the key challenges that the department must
address in order for the financial management operations of the
department to improve to the point where DOD may be able to produce
auditable financial statements.
Committed and sustained leadership. The FIAR plan is in its 6th
year and continues to evolve based on lessons learned, corrective
actions, and policy changes that refine and build on the plan. The DOD
Comptroller has expressed commitment to the FIAR goals, and established
a focused approach that is intended to help DOD achieve successes in
the near term. But the financial transformation needed at DOD, and its
removal from GAO's high-risk list, is a long-term endeavor. Improving
financial management will need to be a cross-functional endeavor. It
requires the involvement of DOD operations performing other business
functions that interact with financial management--including those in
the high-risk areas of contract management, supply chain management,
support infrastructure management, and weapon systems acquisition. As
acknowledged by DOD officials, sustained and active involvement of the
department's Chief Management Officer, the Deputy Chief Management
Officer, the Military Departments' Chief Management Officers, the DOD
Comptroller, and other senior leaders is critical. Within every
administration, there are changes at the senior leadership; therefore,
it is paramount that the current initiative be institutionalized
throughout the department--at all working levels--in order for success
to be achieved.
Effective plan to correct internal control weaknesses. In May 2009,
we reported \16\ that the FIAR plan did not establish a baseline of the
department's state of internal control and financial management
weaknesses as its starting point. Such a baseline could be used to
assess and plan for the necessary improvements and remediation to be
used to measure incremental progress toward achieving estimated
milestones for each DOD component and the department. DOD currently has
efforts underway to address known internal control weaknesses through
three interrelated programs: (1) Internal Controls over Financial
Reporting (ICOFR) program, (2) ERP implementation, and (3) FIAR plan.
However, the effectiveness of these three interrelated efforts at
establishing a baseline remains to be seen. Furthermore, DOD has yet to
identify the specific control actions that need to be taken in Waves 4
and 5 of the FIAR plan, which deal with asset accountability and other
financial reporting matters. Because of the department's complexity and
magnitude, developing and implementing a comprehensive plan that
identifies DOD's internal control weaknesses will not be an easy task.
But it is a task that is critical to resolving the longstanding
weaknesses and will require consistent management oversight and
monitoring for it to be successful.
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\16\ GAO-09-373.
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Competent financial management workforce. Effective financial
management in DOD will require a knowledgeable and skilled workforce
that includes individuals who are trained and certified in accounting,
well versed in government accounting practices and standards, and
experienced in information technology. Hiring and retaining such a
skilled workforce is a challenge DOD must meet to succeed in its
transformation to efficient, effective, and accountable business
operations. The National Defense Authorization Act for Fiscal Year 2006
\17\ directed DOD to develop a strategic plan to shape and improve the
department's civilian workforce. The plan was to, among other things;
include assessments of: (1) existing critical skills and competencies
in DOD's civilian workforce, (2) future critical skills and
competencies needed over the next decade, and (3) any gaps in the
existing or future critical skills and competencies identified. In
addition, DOD was to submit a plan of action for developing and
reshaping the civilian employee workforce to address any identified
gaps, as well as specific recruiting and retention goals and strategies
on how to train, compensate, and motivate civilian employees. In
developing the plan, the department identified financial management as
one of its enterprisewide mission-critical occupations.
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\17\ Pub. L. No. 109-163, div. A, Sec. 1122, 119 Stat. 3136, 3452
(Jan. 6, 2006). The National Defense Authorization Act for Fiscal Year
2010 made this strategic plan into a permanent annual requirement. Pub.
L. No. 111-84, div. A, Sec. 1108, 123 Stat. 2190, 2488 (Oct. 28, 2009),
codified at 10 U.S.C. Sec. 115b.
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In July 2011, we reported \18\ that DOD's 2009 overall civilian
workforce plan had addressed some legislative requirements, including
assessing the critical skills of its existing civilian workforce.
Although some aspects of the legislative requirements were addressed,
DOD still has significant work to do. For example, while the plan
included gap analyses related to the number of personnel needed for
some of the mission-critical occupations, the department had only
discussed competency gap analyses for three mission-critical
occupations--language, logistics management, and information technology
management. A competency gap for financial management was not included
in the department's analysis. Until DOD analyzes personnel needs and
gaps in the financial management area, it will not be in a position to
develop an effective financial management recruitment, retention, and
investment strategy to successfully address its financial management
challenges.
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\18\ GAO, DOD Civilian Personnel: Competency Gap Analysis and Other
Actions Needed to Enhance DOD's Strategic Workforce Plans, GAO-11-827T
(Washington, DC: July 14, 2011).
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Accountability and effective oversight. The department established
a governance structure for the FIAR plan, which includes review bodies
for governance and oversight. The governance structure is intended to
provide the vision and oversight necessary to align financial
Improvement and audit readiness efforts across the department. To
monitor progress and hold individuals accountable for progress, DOD
managers and oversight bodies need reliable, valid, meaningful metrics
to measure performance and the results of corrective actions. In May
2009, we reported \19\ that the FIAR plan did not have clear results-
oriented metrics. To its credit, DOD has taken action to begin defining
results-oriented FIAR metrics it intends to use to provide visibility
of component-level progress in assessment; and testing and remediation
activities, including progress in identifying and addressing supporting
documentation issues.
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\19\ GAO-09-373.
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We have not yet had an opportunity to assess implementation of
these metrics--including the components' control over the accuracy of
supporting data--or their usefulness in monitoring and redirecting
actions.
Ensuring effective monitoring and oversight of progress--especially
by the leadership in the components--will be key to bringing about
effective implementation, through the components' Financial Information
Plans, of the department's financial management and related business
process reform. If the department's future FIAR plan updates provide a
comprehensive strategy for completing Waves 4 and 5, the plan can serve
as an effective tool to help guide and direct the department's
financial management reform efforts.
Effective oversight holds individuals accountable for carrying out
their responsibilities. DOD has introduced incentives such as including
FIAR goals in Senior Executive Service Performance Plans, increased
reprogramming thresholds granted to components that receive a positive
audit opinion on their Statement of Budgetary Resources, audit costs
funded by the Office of the Secretary of Defense after a successful
audit, and publicizing and rewarding components for successful audits.
The challenge now is to evaluate and validate these and other
incentives to determine their effectiveness and whether the right mix
of incentives has been established.
Well-defined enterprise architecture. For decades, DOD has been
challenged in modernizing its timeworn business systems. Since 1995, we
have designated DOD's business systems modernization program as high
risk. Between 2001 and 2005, we reported that the modernization program
had spent hundreds of millions of dollars on an enterprise architecture
and investment management structures that had limited value.
Accordingly, we made explicit architecture and investment management-
related recommendations. Congress included provisions in the Ronald W.
Reagan National Defense Authorization Act for Fiscal Year 2005 that
were consistent with our recommendations. In response, DOD continues to
take steps to comply with the act's provisions and to satisfy relevant
system modernization management guidance. Collectively, these steps
address best practices in implementing the statutory provisions
concerning the business enterprise architecture and review of systems
costing in excess of $1 million. However, longstanding challenges that
we previously identified remain to be addressed. Specifically, while
DOD continues to release updates to its corporate enterprise
architecture, the architecture has yet to be federated \20\ through
development of aligned subordinate architectures for each of the
Military Departments. In this regard, each of the Military Departments
has made progress in managing its respective architecture program, but
there are still limitations in the scope and completeness, as well as
the maturity of the Military Departments' architecture programs. For
example, while each department has established or is in the process of
establishing an executive committee with responsibility and
accountability for the enterprise architecture, none has fully
developed an enterprise architecture methodology or a well-defined
business enterprise architecture and transition plan to guide and
constrain business transformation initiatives. In addition, while DOD
continues to establish investment management processes, the DOD
enterprise and the Military Departments' approaches to business systems
investment management still lack the defined policies and procedures to
be considered effective investment selection, control, and evaluation
mechanisms. Until DOD fully implements these longstanding institutional
modernization management controls its business systems modernization
will likely remain a high-risk program.
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\20\ A federated architecture consists of a family of coherent but
distinct member architectures in which subsidiary architectures conform
to an overarching corporate architectural view and rule set.
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Successful implementation of the ERPs. The department has invested
billions of dollars and will invest billions more to implement the
ERPs. DOD officials have said that successful implementation of ERPs is
key to transforming the department's business operations, including
financial management, and in improving the department's capability to
provide DOD management and Congress with accurate and reliable
information on the results of DOD's operations. DOD has stated that the
ERPs will replace over 500 legacy systems. The successful
implementation of the ERPs is not only critical for addressing
longstanding weaknesses in financial management, but equally important
for helping to resolve weaknesses in other high-risk areas such as
business transformation, business system modernization, and supply
chain management.
Over the years we have reported \21\ that the department has not
effectively employed acquisition management controls to help ensure the
ERPs deliver the promised capabilities on time and within budget.
Delays in the successful implementation of ERPs have extended the use
of existing duplicative, stovepiped systems, and continued funding of
the existing legacy systems longer than anticipated. Additionally, the
continued implementation problems can erode savings that were estimated
to accrue to DOD as a result of modernizing its business systems and
thereby reduce funds that could be used for other DOD priorities.
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\21\ GAO-10-461; DOD Business Systems Modernization: Navy
Implementing a Number of Key Management Controls on Enterprise Resource
Planning System, but Improvements Still Needed, GAO-09-841 (Washington,
DC: Sept. 15, 2009); GAO-08-896; GAO-08-866; DOD Business Systems
Modernization: Key Marine Corps System Acquisition Needs to Be Better
Justified, Defined, and Managed, GAO-08-822 (Washington, DC: July 28,
2008); GAO-07-860.
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To help improve the department's management oversight of its ERPs,
we have recommended \22\ that DOD define success for ERP implementation
in the context of business operations and in a way that is measurable.
Accepted practices in system development include testing the system in
terms of the organization's mission and operations--whether the system
performs as envisioned at expected levels of cost and risk when
implemented within the organization's business operations. Developing
and using specific performance measures to evaluate a system effort
should help management understand whether the expected benefits are
being realized. Without performance measures to evaluate how well these
systems are accomplishing their desired goals, DOD decisionmakers
including program managers, do not have all the information they need
to evaluate their investments to determine whether the individual
programs are helping DOD achieve business transformation and thereby
improve upon its primary mission of supporting the warfighter.
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\22\ GAO, DOD Business Transformation: Improved Management and
Oversight of Business Modernization Efforts Needed, GAO-11-53
(Washington, DC Oct. 7, 2010).
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Another key element in DOD efforts to modernize its business
systems is investment management policies and procedures. We reported
in June 2011 \23\ that DOD's oversight process does not provide
sufficient visibility into the Military Department's investment
management activities, including its reviews of systems that are in
operations and maintenance made and smaller investments. As discussed
in our information technology investment management framework and
previous reports on DOD's investment management of its business
systems,\24\ adequately documenting both policies and associated
procedures that govern how an organization manages its information
technology projects and investment portfolios is important because
doing so provides the basis for rigor, discipline, and repeatability in
how investments are selected and controlled across the entire
organization. Until DOD fully defines missing policies and procedures,
it is unlikely that the department's over 2,200 business systems will
be managed in a consistent, repeatable, and effective manner that,
among other things, maximizes mission performance while minimizing or
eliminating system overlap and duplication. To this point, there is
evidence showing that DOD is not managing its systems in this manner.
For example, DOD reported that of its 79 major business and other IT
investments, about a third are encountering cost, schedule, and
performance shortfalls requiring immediate and sustained management
attention. In addition, we have previously reported \25\ that DOD's
business system environment has been characterized by: (1) little
standardization; (2) multiple systems performing the same tasks; (3)
the same data stored in multiple systems; and (4) manual data entry
into multiple systems. Because DOD spends billions of dollars annually
on its business systems and related IT infrastructure, the potential
for identifying and avoiding the costs associated with duplicative
functionality across its business system investments is significant.
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\23\ GAO, Department of Defense: Further Actions Needed to
Institutionalize Key Business Systems Modernization Management Control,
GAO-11-684 (Washington, DC: June 29, 2011).
\24\ GAO, Business Systems Modernization: DOD Needs to Fully Define
Policies and Procedures for Institutionally Managing Investments, GAO-
07-538 (Washington, DC: May 11, 2007); Business Systems Modernization:
Air Force Needs to Fully Define Policies and Procedures for
Institutionally Managing Investments, GAO-08-52 (Washington D.C.: Oct.
31, 2007); Business Systems Modernization: Department of the Navy Needs
to Establish Management Structure and Fully Define Policies and
Procedures for Institutionally Managing Investments, GAO-08-53
(Washington, DC: Oct. 31, 2007).
\25\ GAO, Opportunities to Reduce Potential Duplication in
Government Programs, Save Tax Dollars, and Enhance Revenue, GAO-11-
318SP (Washington, DC: Mar. 1, 2011).
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CLOSING COMMENTS
In closing, I am encouraged by the recent efforts and commitment
DOD's leaders have shown toward improving the department's financial
management. Progress we have seen includes recently issued guidance to
aid DOD components in their efforts to address their financial
management weaknesses and achieve audit readiness; standardized
component financial improvement plans to facilitate oversight and
monitoring; and the sharing of lessons learned. In addition, the DCMO
and the DOD Comptroller have shown commitment and leadership in moving
DOD's financial management improvement efforts forward.
The revised FIAR strategy is still in the early stages of
implementation, and DOD has a long way and many longstanding challenges
to overcome, particularly with regard to sustained commitment,
leadership, and oversight, before the department and its military
components are fully auditable, and DOD financial management is no
longer considered high risk. However, the department is heading in the
right direction and making progress. Some of the most difficult
challenges ahead lie in the effective implementation of the
department's strategy by the Army, Navy, Air Force, and DLA, including
successful implementation of ERP systems and integration of financial
management improvement efforts with other DOD initiatives.
GAO will continue to monitor the progress of and provide feedback
on the status of DOD's financial management improvement efforts. We
currently have work in progress to assess implementation of the
department's FIAR strategy and efforts toward auditability.
As a final point, I want to emphasize the value of sustained
congressional interest in the department's financial management
improvement efforts, as demonstrated by this Subcommittee's leadership.
Chairwoman McCaskill and Ranking Member Ayotte, this concludes my
prepared statement. I would be pleased to respond to any questions that
you or other members of the subcommittee may have at this time.
For further information regarding this testimony, please contact
Asif A. Khan, (202) 512-9095 or khana@gao.gov. Key contributors to this
testimony include J. Christopher Martin, Senior-Level Technologist; F.
Abe Dymond, assistant Director; Gayle Fischer, assistant Director; Greg
Pugnetti, assistant Director; Darby Smith, assistant Director; Beatrice
Alff; Steve Donahue; Keith McDaniel; Maxine Hattery; Hal Santarelli;
and Sandy Silzer.
APPENDIX I: FIAR PLAN WAVES
The first three waves focus on achieving the DOD Comptroller's
interim budgetary and asset accountability priorities, while the
remaining two waves are intended to complete actions needed to achieve
full financial statement auditability. However, the department has not
yet fully defined its strategy for completing waves 4 and 5. Each wave
focuses on assessing and strengthening internal controls and business
systems related to the stage of auditability addressed in the wave.
Wave 1--Appropriations Received Audit focuses on the appropriations
receipt and distribution process, including funding appropriated by
Congress for the current fiscal year and related apportionment/
reapportionment activity by the OMB, as well as allotment and sub-
allotment activity within the department.
Wave 2--Statement of Budgetary Resources Audit focuses on
supporting the budget-related data (e.g., status of funds received,
obligated, and expended) used for management decision making and
reporting, including the Statement of Budgetary Resources. In addition
to fund balance with Treasury reporting and reconciliation, other
significant end-to-end business processes in this wave include procure-
to-pay, hire-to-retire, order-to-cash, and budget-to-report.
Wave 3--Mission Critical Assets Existence and Completeness Audit
focuses on ensuring that all assets (including military equipment,
general equipment, real property, inventory, and operating materials
and supplies) that are recorded in the department's accountable
property systems of record exist; all of the reporting entities' assets
are recorded in those systems of record; reporting entities have the
right (ownership) to report these assets; and the assets are
consistently categorized, summarized, and reported.
Wave 4--Full Audit Except for Legacy Asset Valuation includes the
valuation assertion over new asset acquisitions and validation of
management's assertion regarding new asset acquisitions, and it depends
on remediation of the existence and completeness assertions in Wave 3.
Also, proper contract structure for cost accumulation and cost
accounting data must be in place prior to completion of the valuation
assertion for new acquisitions. It involves the budgetary transactions
covered by the Statement of Budgetary Resources effort in Wave 2,
including accounts receivable, revenue, accounts payable, expenses,
environmental liabilities, and other liabilities.
Wave 5--Full Financial Statement Audit focuses efforts on assessing
and strengthening, as necessary, internal controls, processes, and
business systems involved in supporting the valuations reported for
legacy assets once efforts to ensure control over the valuation of new
assets acquired and the existence and completeness of all mission
assets are deemed effective on a go-forward basis. Given the lack of
documentation to support the values of the department's legacy assets,
Federal accounting standards allow for the use of alternative methods
to provide reasonable estimates for the cost of these assets.
In the context of this phased approach, DOD's dual focus on
budgetary and asset information offers the potential to obtain
preliminary assessments regarding the effectiveness of current
processes and controls and identify potential issues that may adversely
impact subsequent waves.
Senator McCaskill. Thank you, Mr. Khan, and thank you for
all of your work in this area.
We will begin questions now. Let me start with using an
example, because the challenge of this hearing is to make this
product consumable to the public and to my fellow Senators in a
way that allows us to keep attention and pressure on this
issue.
I think one of the reasons that DOD has failed at this for
so long is because it never received the kind of attention and
emphasis that it should have through the years, particularly as
it relates to sun-setting legacy systems and interfacing
between the various functions of the military. The military, I
think, is famous for its silo capability, and no place has the
silo been more prevalent than in the management of financial
information within DOD.
But there are real consequences to the failures that have
continued to plague DOD in terms of financial management. It
caught my eye that there was a report just issued a few days
ago, and this is from the IG of DOD. The cost of war data for
Marine Corps contingency operations were not reliable.
What this report said is that the data--out of $4.3 billion
in Marine Corps transactions, the IG found that 86 transactions
valued at $1.82 billion were not properly supported. In
addition, almost $1.5 billion in transactions were reported in
the wrong operation or cost category. As a result, data
provided to Members of Congress and other decisionmakers did
not reflect how funds were really actually spent.
Now, it is astonishing to me that we would have almost half
of the transactions in a contingency operation not properly
supported and that we would have $1.5 billion in those
transactions in the wrong cost or operations category.
I want to give you a chance, Secretary Commons, to respond
to the report. I know that management has been asked to provide
completion date for the recommendations on this audit by August
22. I would ask you that this committee would also like to
receive the completion date for the recommendations that have
been made in this audit.
But I want to give you a chance to respond to this recent
report that Congress is not getting accurate information about
how we are spending our money in Iraq and Afghanistan when it
comes to Marine Corps operations.
Ms. Commons. Madam Chairman, I believe for that report, it
was a matter of establishing a cost code to report those costs,
and we had not promulgated that information to all of our field
activities. So some of them did, in fact, record it in the
wrong category.
We are in the process of correcting that and putting out
policy so that they will know exactly how to report the costs
in the proper category. We will work with that. We will be
happy to give you the information about the completion date and
the precise actions that we will take to make sure that that
does not happen in the future.
Senator McCaskill. It is very troubling that we are not
getting cost codes to people in the field. The taxpayers of
this country have spent an enormous amount of money on these
contingency operations. I don't need to go through the record
as to how many different ways we have figured out that we
weren't keeping good track of the money in contingency
operations.
So we will look forward to responses on this and, most
importantly, look forward to a signal from the IG that they are
more comfortable that we are keeping track of contingency
operations spending.
Let me now briefly go to the Global Combat Support System
(GCSS)-Army and GCSS-Marine Corps systems. One of the elements
of the FIAR plan, which is the FIAR plan that people have
referred to, is the existence and completeness of critical
assets.
In a report that is scheduled to be issued tomorrow, GAO
says that DOD's business systems make it difficult to obtain
timely and accurate information on the assets that are present
in theater and operations, and DOD lacks a comprehensive plan
for addressing the problem.
They go on to say ongoing efforts to modernize or replace
DOD business information systems, including systems supporting
supply chain management, are intended to improve data quality.
However, we have found that data quality problems persist, and
these systems are not designed to routinely share data across
organizational boundaries, such as among Military Departments.
So this is the situation we have. We have the Army and the
Marine Corps sharing equipment in theater. Anybody disagree
with that--that they are sharing equipment in theater, the Army
and the Marine Corps?
Okay. They both are designing systems to track real-time
equipment in theater, equipment that they are sharing. Now,
$3.9 billion we are planning to pay for this system for the
Army, almost $4 billion for a system to track equipment for the
Army. We are paying another $934 million, or another $1
billion, to develop and field the same kind of system for the
Marine Corps to track the same equipment.
Now, here is the punch line. They don't speak to each
other. Now, how does this happen? How do we end up buying $5
billion worth of systems to track the same equipment that don't
talk to each other? That is for, obviously, the Army and the
Navy, but also I would love to hear from Ms. McGrath or
Secretary Hale on this question also.
Ms. McGrath. I am happy to start.
The two systems, although they sound very similar in the
capabilities they deliver for the respective organizations, are
embedded into very different, I will say, business processes
that they execute their both supply and maintenance
infrastructures.
So, although they sound very much the same, they do operate
within two very different infrastructures and processes, and
they are not one-for-one used by the same people. So, although,
as I mentioned, they sound very similar, there is a lot more
detail behind the execution of those systems and those
capabilities that those systems enable.
Senator McCaskill. They couldn't use the same system?
Ms. McGrath. That said, I do believe that because the
Marine Corps has fielded, GCSS-Marine Corps--they are certainly
further ahead in their implementation than the Army is to
date--that the Army did, as part of their analysis of
alternatives (AoA), it is my understanding, take a look at the
GCSS-Marine Corps capability as part of their AoA prior to
making the decision to go with a different application to
deliver their capability.
Senator McCaskill. I would like to find out who that person
was that made that decision, that looked at the Marine Corps. I
would like the analysis as to why the Marine Corps system was
not adequate and why we had to spend another $4 billion.
That is a significant price tag, and it is--there better be
damned good reasons as to why the Marine Corps system was
inadequate, if it was so inadequate that you had to spend
another $4 billion to get the job done.
So, I would appreciate knowing who the decisionmakers were
on that item. I would like to have a written analysis of why
the Marine Corps system was inadequate and why it remains
inadequate today.
In light of our current fiscal climate, why they cannot
suck it up and use the same system the Marine Corps is using to
track equipment since it has been fielded.
Ms. McGrath. Yes, ma'am. There is an AoA that is required
to be done on every one of those business systems. So, for us
to provide to you, we could do that in the very near-term.
[The AoA for the Global Combat Support System Army,
follows:]
[See annex printed at the end of this hearing].
Senator McCaskill. Okay, great. Thank you very much.
Senator Ayotte.
Senator Ayotte. Thank you, Madam Chairman.
I wanted to follow up on the IG's report. I know that you
are going to report back to this committee, but I think what
that report showed is that the reconstruction money, defense
dollars, are particularly susceptible to waste, fraud, and
mismanagement, in conjunction with the Overseas Contingency
Operations (OCO) funding.
What is it that--I know we are going to get a report back.
But Secretary Hale, what is it that you see, having reviewed
that report, that needs to be done to DOD to improve that
process, the financial management of the OCO funding?
Also, I guess in conjunction with that, the other piece of
that report, which I am deeply interested in, had to do, of
course, with the money that was going to our enemy because we
were contracting in some instances with those that were
collaborating with our enemy. Senator Brown and I have a bill
that is incorporated in the NDAA.
But I think also recently when we asked General Dempsey in
his confirmation hearing about this topic, he pointed out that
there was a need for more contracting officers, better-trained
contracting officers.
So I throw all of that at you and would ask you to say,
when you reviewed that report, what was the impression you had
in terms of what we need to do differently? I would like to
have Mr. Khan also comment on that.
Mr. Hale. Let me focus on the corruption issues in
Afghanistan. There are major problems, Senator Ayotte. I think
you know that. We have established a task force to try to
reduce it where we can. We are dealing with a culture that is
just different than ours.
But I believe they are having some success. They have
started vetting contractors and subcontractors to try to weed
out those that have bad records. They are trying to work with
Afghan officials, the ones that we can work with well, to
minimize corruption.
We have gotten most of the cash off the battlefield. We pay
for hardly anything in U.S. cash now in Afghanistan. It is
almost all electronic funds transfer. Where we can, we pay in
afghanis, which are a lot harder to export to outside the
country.
So I think there is some progress. But it is an uphill
fight, and we are dealing with just a very different culture
than the one we have. So the best answer I can give you, it is
going to be an ongoing issue, I think, as long as we are
involved in Afghanistan.
Senator Ayotte. Can you also follow up to the issue that
the chairman raised in terms of the misallocation of funds in
terms of the OCO funding?
Mr. Hale. I am going to defer that one to Ms. Commons. I,
frankly, have not reviewed that particular report. I think she
answered it. I will look at it, but I have not.
Senator Ayotte. I know that you had answered to it, but I
thought maybe you might have some insight on that as well.
Mr. Hale. I would underscore what she said. We need to fix
it, and I think what I heard Gladys say was we need to get the
right codes out there.
I don't know that we violated the Anti-Deficiency Act or
anything like that. But we need to get it in the right category
so we are supporting and providing the information that we all
need. Not just you, I need it, and we all need it. So we need
to fix it.
Senator Ayotte. I also wanted to ask you about the
milestones that have been completed since you submitted your
last report on DOD's FIAR plan in November 2010. According to
your most recent report, which you submitted in May, DOD
accomplished only 1 milestone and 11 were pushed out to future
dates.
So, as I understand the math, 1 for 12. Your report also
identifies another set of milestones called the interim goals
for initial FIAR opportunities--excuse me, priorities--and the
results here aren't much better, with four milestones being met
and nine pushed out to later dates.
So if we put that all together, we are basically 4 for 13
on these interim goals, and DOD has been citing those as things
that it has been focusing on. But if we look at it as 5 for 25,
shouldn't we be concerned about this? What does it suggest in
terms of DOD's ability to meet the 2017 deadlines?
If Mr. Khan can also comment on this, I would appreciate
it.
Mr. Hale. I haven't counted them in the fashion you have,
but I will accept your math. I like to look at the ones we have
actually started, and I think they are so important. We haven't
done any in the past in terms of validations. We haven't had
any goals, nor have we done any to speak of.
We actually have an audit of a Military Service underway.
First time that has ever happened in DOD. I won't go through
them all again, but we have a number of the validations.
I don't want to waste the money by pushing if we are not
ready, but I hear your point that we need to pick up the pace
in terms of meeting these deadlines. I share your concern.
Again, I haven't counted them quite that way, but I will
accept your math and accept the challenge that we need to pick
up the pace.
Senator Ayotte. Is there anything more that we can be doing
as Congress to help this process move forward? Because,
obviously, you are working toward it. Are there obstacles that
we have put in place, or can we better give you the tools that
you are missing right now?
Mr. Hale. I rarely ask for hearings, but I think some
steady pressure, hopefully moderate pressure, is a good idea.
It focuses us, just as I had a boss early in my career who said
to me when I became confirmed, ``Yours is the power to call
meetings.''
That sounded very bureaucratic, but I learned that he was
right because it focused attention. Well, yours is the power to
call hearings, and it also focuses attention.
There are some things you can do. One in particular. We
haven't talked about it, but we have proposed a course-based
certification program for defense financial managers, similar
to the one in acquisition. It will establish a framework we
don't have now. It will allow us to require courses.
We want it to be mandatory with appropriate waivers. That
will require legislation. It is in the House bill. I believe it
is in the Senate Armed Services Committee (SASC) bill. I think
the SASC language is very good, and I hope that it survives in
conference. So I would appreciate your help there.
I will say one more thing you can do, and I know you can't
do this personally. Don't put us on another Continuing
Resolution for 6 months. I can't tell you how much time that
drained from financial managers. It is very difficult to
manage, and it also was devastating, I think, to our
contracting workforce.
So if there is any way we can avoid that, I would hope you
would try.
Senator Ayotte. Secretary Hale, I have to tell you, this is
music to my ears because I am the newest appointment to the
Senate Budget Committee, and I am anxious for us to actually
get down to the hard work of putting together a budget. I
couldn't agree more that this short-term funding is not the
best way to fund a government, nor is it the best to deal with
the fiscal crisis that we face.
Mr. Hale. A debt ceiling agreement would help, too.
Senator Ayotte. Well, there you go. [Laughter.]
I don't know if Mr. Khan had any comments? My time is up.
But if you had any comments?
Mr. Khan. Just to add to what Mr. Hale said, I think there
have been slippages in milestones. The more important ones to
view and to keep track of are the slippages in the ERP
milestones.
2017 is going to be upon us very soon, sooner than we
expect. Without the implementation or effective implementation
of those ERPs within the Services, it will be a challenge
reaching the 2017 milestone to be audit ready.
Thank you.
Senator Ayotte. Thank you.
Senator McCaskill. Thank you.
I do want to say for the record that the irony is not lost
on at least the subcommittee chairman that it does take some
nerve for us to call a hearing calling you to task for your
lack of fiscal management in light of what we are busy trying
to get done here in the halls of Congress this week.
Clearly, this could be in the category of, ``Hello, pot,
this is kettle.'' [Laughter.]
So I do get that part.
Senator Begich, questions?
Senator Begich. Thank you very much, Madam Chair.
Let me, if I can, and whoever can answer this, and then I
may have some additional follow-up to it.
First, we know the Corps of Engineers--and maybe this is
for Secretary McGrath and Secretary Hale. I am not sure which
one. But the Corps of Engineers and Defense Contract Audit
Agency have auditable financial statements. I heard you
mentioned a little bit, but I want to follow through on this.
They are able to be audited. What are we learning from that?
I guess, just so you know, I am just a little frustrated. I
know a lot of you folks are new to the process here. But I am
frustrated that we are not--it is one of the largest units, and
we can't audit ourselves. So I won't go through that lecture.
But how does the Corps do it? What are you doing to
replicate or improve on that? Why is it going to take you 6
years?
Mr. Hale. The Corps is a lot smaller. I don't take away
from their accomplishment one bit. It took them about 8 years,
I might add, to get there. But they are a lot smaller, and that
makes it easier.
We have learned, I think, from what they have done and are
trying to copy their successes. Even more importantly, we are
finally, as I have said, auditing the financial statement, one
of them, of a Service, the Marine Corps statement of budgetary
resources. We are learning a great deal from that.
It is discouraging in some ways because I think we have
learned that our business processes are simply not standard,
sufficiently standard to accommodate an audit, and I believe
that is going to be true throughout all of the Military
Services.
To start to fix that, I have asked the Services to assemble
teams, probably from their audit agencies, that should go out
to the commands and get a report on financial processes and
make an assessment for us about what we have to do to improve
them so that they are auditable. I hope that we can get that
started soon. We are working internally to move ahead.
So that is an important lesson learned. The other reason it
takes so long are the systems. We simply have to have them. I
think it is particularly true in the Army and the Air Force.
Their systems are sufficiently old that they just aren't going
to support what an audit requires.
They take time to implement and money, and both are in
short supply, particularly the money. I am not making excuses.
I know it sounds like whining. I would like to go faster, too.
Senator Begich. No, let me walk through this. Are you going
to do within each one of those kind of--and it sounds like you
are, to some extent--but instead of waiting for the whole thing
to be developed, are you going to do subaudits?
Mr. Hale. Yes.
Senator Begich. I know when I was on my local assembly, I
was chair of the Budget and Audit Committee for, I think, 2 or
3 years. We were given a presentation to change the system and
do the whole thing.
They were going to do the whole thing all at once, which
was going to be a disaster. You could see it coming. We forced
them into kind of these micro elements so we could actually
refine it as it moved along. Is that the game plan?
Mr. Hale. Yes. That is the game plan and a focused
strategy. So let us focus on the information we most use to
manage, which makes sense, let us start with the stuff that we
actually need, which would include the budget, because we
manage the place based on budgets, and also knowing where our
assets are and how many we have because that is critical to
warfighters.
So we focused first on that. We will take pieces within
that as well. These validations that I spoke of are essentially
mini audits. Pick a section they think we are ready to go. We
will hire an independent public accountant or, in some cases,
the IG, and ask him to go in and give us advice.
We are already finding that we are learning a lot from
those because they can tell us, ``Hey, you are doing okay here,
but you are not doing okay there. You have to change.''
Senator Begich. Let me ask you in regards to assets. I am
trying to follow up on what the chairwoman was getting to. That
is so the Army versus the Air Force versus the Marine Corps, is
their management of their assets systems different, or will be
different? I am seeing a head shake ``yes'' here. So it wasn't
your words, but I saw a head over here----
Mr. Hale. I would say they have different processes.
Senator Begich. That is not what I am asking. I am not
sure--an asset is an asset, okay? As a former mayor, I had a
police department, a fire station. We had the same system. They
had different missions. They had sub-missions. Then I had
public works, libraries. Everyone had a different mission, but
the asset management was the same.
So, as a mayor, if I wanted to know, at any given point,
what my capacity is in an emergency, what kind of equipment was
available department-wide, city-wide, I could do that.
Ms. McGrath. So their total asset visibility is what you
are talking about, and the GCSS capabilities that we have
discussed, both the Army and the Marine Corps, are their
respective contributors, if you will, to that total asset
picture.
There is another, I will call it a command-and-control
system that has a responsibility to bring that asset visibility
from the respective components into that common operating
picture. Today, my understanding is that we don't have that
total asset visibility in the aggregate because we don't have
defined, I will call them standards across DOD.
Senator Begich. That is your goal?
Ms. McGrath. Yes, absolutely. Moving toward not only the
standards within the logistics space for asset visibility, but
total asset visibility, period, irrespective of commodity, be
it a ship or a plane or a piece part.
That is tied to the overarching logistics, I will call it
road map, so that they have that common operating picture, both
on the field and in the business space.
Senator Begich. Let me ask you another question in regards
to the layers. As you guys are doing your work, and not to be
disrespectful, but like us, we come and go. It is the layers
deeper down.
What is going to change in that culture after how many
years of no audits, forever? So how are you going to change
that?
I know you are going to say you are going to do training.
You are going to do this and do that. But the reality is some
of those people will have to go. That is just the way it is.
Because I know this--you cannot retrain 100 percent of the
people to change the way they have been doing business for the
last umpteen years.
One, are you going to do that? Do you have the systems to
do it and a process that is going to be immediate, not just,
well, we have to kind of move them over here and move them over
there to survive?
Because if you don't do that, it doesn't matter what system
you have. Because the people--and this is my simplistic way of
saying it--at the front desk, putting the data in, wherever
they may be stretched across the globe, wherever our assets
are--if they are not trained or understand the new culture, you
are going to still have problems down the road.
So to me, it is going to be those layers deeper down. What
are you going to do to dramatically change that culture? Are
you going to be able to do and have the wherewithal to say to
them we are not doing business that way. If you don't like
working here, then get the hell out because we have to change
the way we do business.
Who wants to take that one?
Ms. McGrath. Again, I will start. The change management
challenge, I think, is the largest challenge. There are many
challenges----
Senator Begich. The change--the culture?
Ms. McGrath. The culture, right. The change management
challenge, articulating both the business value and the need to
change so that people understand what their contribution is to
the overall business outcome you are trying to achieve. Here we
are talking about financial auditability.
Some of the things that have been discussed in terms of
taking a cross-functional look at achieving auditability we are
putting in place largely due to a lot of the tools that
Congress has provided us in the NDAA legislation, ensuring that
we have done appropriate business process reengineering. So the
front desk individual can't do things the way they are
accustomed to doing. They must change.
Senator Begich. So my question is, if you can't get them to
change, do you have the mechanisms to get rid of them? That is
the ultimate question because the human element is what starts
the train moving.
Ms. McGrath. I think, through the systems implementations
and the drive to the business outcomes driven by not only the
top leadership but layers down is what is required to make
those changes happen. I think that all of the tools we are
putting in place, institutionalizing where we can, wherever we
can, will help enable that sustained practice.
Senator Begich. Simple question--I am going to end here. Do
you have the capacity to get rid of people who are not--it is
human nature in any organization change that you are going to
have a percentage that will not adapt. That will want to keep
their job, but will not adapt.
That is the ultimate question, because if you don't get
that information flowing on the front end, I guarantee you,
whatever you see on the top, it is going to be a problem. That
is my only question--yes or no?
It is a pretty--you should say yes to this. I am trying to
help you.
Ms. McGrath. Well, no, no----
Mr. Hale. Yes, but this is not a strength of the Federal
Government. It is very difficult to terminate employees. But,
yes, the process exists. It is just it is cumbersome, and it
tends to take a long time.
Senator Begich. But you understand the problem?
Ms. McGrath. Absolutely, and I think that driving a change
management through efficiencies and effectiveness at the
organization will enable those people to I want to say get out
of the way, whether----
Senator Begich. Think about their future?
Ms. McGrath. Think about their future--much better words.
Senator Begich. Okay. I will leave it at that.
Thank you, Madam Chair.
Senator McCaskill. Senator Cornyn?
Senator Cornyn. Thank you, Madam Chairman.
Thank you all for coming today.
I am here because I am concerned about our national
security. During tight budgetary times, I know DOD is going to
have to be doing more with less. I intend to make it one of my
responsibilities to make sure it is adequate to the task and
the challenges we face.
But as someone who believes that national security is the
number one responsibility of the Federal Government, I simply
can't explain to my constituents some of the anecdotes that we
have heard with regard to financial mismanagement. I appreciate
what you said, Secretary Hale, that a little firm pressure is a
good thing, and I just wanted to show up and let you know I am
going to be contributing to that. [Laughter.]
That pressure is going to get firmer and firmer and firmer,
using every tool that I have, whatever that may be.
But when I read an interview in 2008 that the Comptroller
at the DISA gave to Federal News Radio where he acknowledged
both the problems with the financial management discipline that
you talked about, as Senator Ayotte identified, the 10-to-1
savings, $10 basically saved for every dollar invested in
financial management system improvement.
But they actually, in this radio interview, said that they
found $400 million at DISA. This is for an agency that has
16,000 personnel. So, if you multiply that across all the
personnel, assuming you could do that, it is shocking, to say
the least.
I was delighted to hear Secretary Panetta testify, both
informally and at his hearing, that he intended to make this a
priority. I appreciate all the work that each of you are doing
to make it a reality. But it strikes me along the lines that
Senator Begich mentioned, that what is critical is to have
goals, resources, and accountability.
I know the chairwoman well enough and Senator Ayotte and
the rest of us enough to know that we intend to provide you
with not only the goals, but the resources and also the
accountability that is going to be necessary for your success
and our collective success.
Secretary Hale, in 2006, you headed up a task force to look
into the possibility of creating a CMO for the Secretary of
Defense. In your report, your task force recommended creating a
position with responsibility and authority to be the CMO/Chief
Operating Officer for DOD, a principal under the Secretary of
Defense for management and CMO.
There continues to be difficulty with not having senior-
level managers armed with appropriate budgetary and
organizational authority needed to direct Under Secretaries and
Service Secretaries responsible for the day-to-day management
of DOD's financial improvement and business transformation
efforts across all the functions within DOD.
Why isn't the approach that you recommended when you headed
up the task force needed today?
Mr. Hale. I think DOD chose another route, which is to vest
that authority in the Deputy Secretary. They wanted one
Secretary, and I understand that.
They did create a DCMO. She is sitting to my left. I think
it has been very valuable to DOD. It has given somebody who has
the experience, the time to focus on the systems.
They used to fall as a collateral duty to the Comptroller,
in many respects, and it wasn't happening because the budget
was so overwhelming in terms of time. It has given somebody who
has the experience and the time the opportunity to focus on
performance management and other things that Beth does.
So I believe it has worked out well. They did choose a
different route, and I accept that. We were an advisory group
when I issued that report. I wasn't, I think, the lead, but I
was on the team. But I think it is working reasonably well.
I am pleased with the DCMOs--and not just, I might add, at
OSD. Let me add something maybe, Madam Chairman. We had a
hearing on efficiencies. We just finished a review with each of
the Services and the defense agencies.
I confess I was skeptical going in about how well we were
doing with the plans for those--that is $178 billion in fiscal
year 2012 to fiscal year 2016. I am much more encouraged. The
Services are clearly taking this very seriously. They all have
management structures. Generally, they have plans for the
fiscal year 2012 and fiscal year 2013, or where they can't meet
them, and there are cases, they are looking actively to
substitute other efficiencies.
So I believe I teamed with Beth, the DCMO, in that effort,
and I think she was very helpful, and her office. So I am
feeling better about the $178 billion, and I know that we are
going to have to look for more and that we will need to
continue that oversight.
So I just wanted you to know that we are working the issue,
and wherever Secretary Gates is, I want to tell him, too.
Senator Cornyn. Ms. McGrath, since you are the DCMO, how do
you feel about the recommendations of Secretary Hale's task
force and the alternative direction DOD has taken? Do you feel
that you have the resources you need not only to do your job,
but to hold other people in DOD accountable?
Mr. Hale. Can I just clarify one thing? I wasn't the
Secretary at the time. That was an advisory group. I just want
to make sure that I didn't make the recommendation as the
Secretary. I was on the Defense Business Board.
Senator Cornyn. If I misspoke, I apologize. I knew you
headed up the task force, or at least that is in my notes here.
But Ms. McGrath?
Ms. McGrath. I feel that the DCMO has the authority through
the CMO, or the Deputy Secretary of Defense, where I am going
to say all of this conversation comes together to execute both
the priorities, some of the oversight that Mr. Hale talked
about in terms of efficiencies, both the follow-through and
execution, and the identification of new ones.
I work very closely with the Under Secretaries of the
Military Departments, as the CMOs of the Military Departments.
Again, they are looking from a corporate perspective how do
things integrate. So, I actually do think it is an effective
structure and that DOD has capitalized on the opportunity and
is using it effectively.
Senator Cornyn. Mr. Khan, do you agree or disagree?
Mr. Khan. The positions have been established, and people
have filled those offices. We are waiting for how these
particular offices are going to result in specific actions.
One of the positives that maybe I can point out, and that
is the example we are looking for, was the recent removal of
the DOD personnel security from DOD high risk. That is a
positive. We are looking for the same type of intensity, same
type of commitment and leadership for the removal of the other
high-risk areas.
So we are much more focused on results. There have been
plans. There have been governance boards. The role of the CMO
or the CMO organization at the Military Departments is to drive
the transformation.
As far as from what we can see, it is a start, but we want
to see the results. The results would be how it impacts, how
the role, responsibilities, and action impact some of the other
longstanding and pervasive weaknesses. We would like to see
some more action on the other high-risk areas--financial
management being one area.
Senator Cornyn. Thank you. My time is up.
Senator McCaskill. Thank you, Senator.
Senator Manchin.
Senator Manchin. Thank you, Madam Chairman.
I am so sorry that I was running late. I had another
meeting to be at, but I wanted to fill in a few things.
First of all, the concern, I think, that Senator Ayotte
talked about is what we have is with what is happening and what
we are hearing about happening as far as the corruption,
outright thievery that goes on over in Afghanistan and Pakistan
and every place else that we seem to be doing business over
there.
It is hard for me to understand how $10 million can go
missing in cash. The report, I think, is $10 million a day, up
to about $10 million a day. Did you touch on this, Kelly?
Senator Ayotte. I didn't touch on the numbers, but, yes,
talked about it.
Senator Manchin. But $10 million, that is $3.6 billion a
year. This has been going on for I don't know how long. I have
been over there a few times. So we see a lot of concerns we
had. But I can follow up with another question that might be
something more on your line, if that is not in your line on the
money.
Mr. Hale. It is in my line. Anything to do with money. I am
not familiar with the specific numbers. I will say what I said
earlier.
There is a problem in Afghanistan. It is a different
culture. We are doing our best to push for less corruption. We
have established a task force under the command now of General
Allen. It has done a number of specific things--vetting of
contractors and subcontractors to try to be sure that we are
dealing with people that are reliable, working with the
officials where we can work with them to try to minimize this
problem.
We don't use American cash anymore in Afghanistan. Almost
all of it is electronic funds transfer. We are trying wherever
we can to pay local vendors in afghanis. It is a lot harder to
export those to other nations.
All of these are good things, and we need to continue, and
we need to push this hard. I think we probably won't fully
solve the cultural issues. We will do our best.
Senator Manchin. No, I know that. I can give you a few
examples.
I have a constituent who is in the military and working
with the Afghanistan Ministry of Interior, Public Affairs. He
tells me that 250 to 1,000 vehicles that we purchased through
U.S. tax dollars are missing. That is a lot of vehicles that go
just missing.
I was a former Governor, and all of us have had former
positions we were responsible for offices. I was responsible
for the State budget and how we procured. It all starts with
how you purchase. If you don't have a good purchasing system,
you are not going to have good auditing because you can't
follow it.
We revamped our whole purchasing, and we had to have a
purchase order. It had to be one that was of need. The purchase
order followed into a purchasing agreement. The purchasing
agreement followed into basically a complete auditing system
that had to show how we disposed of it also.
I don't know why it is so complicated, and why you--has it
just morphed into something so large that it is just
unmanageable for you all?
Mr. Hale. I think we are just dealing with different
attitudes than we do in the United States toward
accountability.
Senator Manchin. I am not even saying over there. I am just
saying how we do our business.
Mr. Hale. Oh, here.
Senator Manchin. Yes, I mean----
Mr. Hale. I am not dealing with 250,000 vehicles missing in
the United States. I need to know about that.
Senator Manchin. Well, I am----
Mr. Hale. Is that here? Is that what you are saying?
Senator Manchin. I am just asking when was the last time we
had a really good audit for the entire DOD?
Mr. Hale. Well, we have never had a successful one.
Senator Manchin. That is what I thought.
Mr. Hale. A financial audit. I hear your point. But I do
believe that--I mean, I am not aware of----
Senator Manchin. I am brand new. I am the new kid on the
block here. I can't--it is just inconceivable for me how DOD,
being one of our largest, and you can see the amount of money
we put into it. We were told yesterday that we spend more money
on defense than all the other nations combined.
I don't know if that is accurate or not, but it might be
right close.
Mr. Hale. Might be.
Senator Manchin. How we don't have a handle on this thing.
Mr. Hale. Let me come at that differently. I believe we do
have reasonable financial controls--and I know this probably
won't be a popular statement--in DOD on the budgetary--on the
money you give us. I think we aren't over there spending your
$671 billion that you gave us any way we want.
I say that for two reasons. One, we have 60,000 people who
do have a culture of stewardship. I have a lot of personal
familiarity with them, and I know they do.
But we also have external auditors. We have about 3,000
auditors in DOD watching our every program and financial move.
It is really a notch in their belt to find that we violate the
law or the rules. That should be. That is their job.
Over the last 5 years, if you look at violations of the
major Federal law governing financial management, the Anti-
Deficiency Act (ADA), 20 cents out of every $1,000--20 cents
out of $1,000--actually resulted in an ADA violation. That is
20 cents too much. My goal is zero, and it is the only right
goal. But it is 200th of 1 percent.
I don't think it suggests a system that has no reasonable
controls. I think we do. We have problems. We need to pass an
audit. But we do, I believe, have reasonable controls.
I might add that the amount of ADA violations are
significantly less than in the non-defense agencies, taken as a
whole.
Senator Manchin. Let me just say this, that you know that
with the financial challenges we are having right now, and we
have our problems, too. So none of us are immune from those
problems. But you know there are going to be some adjustments
as far as the budget--and your budget and everybody's. I think
you----
Mr. Hale. Say it is not so, Senator.
Senator Manchin. You see that coming. To what extent
everyone believes--everyone believes since you all really don't
have an accurate audit, then whatever we have to cut, we could
cut there, and it could probably be made up in the waste or
fraud or abuse.
What do you believe truly is feasible through fraud, waste,
and abuse right now before you start cutting into what we call
the quick of the matter?
Mr. Hale. I can't give you a number. I think that fraud
that goes on----
Senator Manchin. We are going to cut--let us say we can cut
$400 billion.
Mr. Hale. I certainly don't think you can get anywhere near
that from fraud, and waste is in the eye of the beholder.
Senator Manchin. I am saying over a 10-year period. I have
heard anywhere from $400 billion to maybe $800 billion over 10
years. That is $40 billion to $80 billion a year.
Mr. Hale. I don't think you can get anywhere near $400
billion with fraud, waste, and abuse by any reasonable
definition.
Senator Manchin. Over a 10-year period?
Mr. Hale. Over a 10-year period. We will have to make
changes in our strategy in order to accommodate those kinds of
cuts. We will also look for efficiencies of the sort that we
identified and that we are now monitoring, $178 billion over 5
years in that case. But it is not going to do it by itself.
We will have to cut back numbers of troops. We will have to
delay investments, and we will have to look at that in a
strategic context.
Senator Manchin. Then what you are saying, out of a $700
billion a year budget, you don't believe that there is 5 to 7
percent of waste or fraud or abuse in that?
Mr. Hale. I certainly don't think there is 5 to 7 percent
of fraud. Waste is always in the eye of the beholder. There are
some who feel some of our programs are wasteful, even though--
--
Senator Manchin. I agree.
Mr. Hale.--we believe they contribute to national security.
That is a debate we need to have. But, no, I absolutely don't
think that we are sitting there with $400 billion over 10 years
of fraud. I don't know of any evidence.
If that were true, how come those 3,000 auditors are only
finding 20 cents out of every $1,000 that violates the ADA?
Because it is a violation--it would be. Fraud is almost
certainly going to be a violation.
Senator Manchin. So you are basically thinking it might be
more policy, deciding on what we think we need and what we
don't need?
Mr. Hale. Absolutely. We are looking at it carefully, and
we will be responsive. But it is not going to be--it will be
fewer troops and less investments.
Senator McCaskill. I know you can't put a number on it. I
think that sometimes that waste part is in the eye of the
beholder. I would say that two systems tracking assets that
can't speak to each other, even if one has much more capability
than the other, a $5 billion price tag on IT that is tracking
assets is a huge number in any private sector enterprise, even
as big as DOD.
But let me ask about accountability. Who is the single
official within DOD who is responsible for the FIAR plan?
Mr. Hale. It would be the Secretary of Defense. But he has
basically delegated that to the CMO, the Deputy Secretary.
But in an organization our size and with the scope of the
responsibility, I think you are looking at the rascals who have
the day-to-day responsibility--the CFO and the DCMO at the OSD
level; the Service FMs and the Service DCFOs--DCMOs, I should
say, at the Service level.
Senator McCaskill. Who has the primary responsibility on
all the feeder systems?
Mr. Hale. That would be the Service--you want to take a
shot at that?
Ms. McGrath. So the systems that really, I am going to say,
it depends where they are in their respective life cycle in
terms of who has the day-to-day operational control and then
investment decisions.
Through the investment review board process, we have been
able to obtain greater visibility in terms of development and
modernization, and so that we do have an oversight process
required by statute, where we are reviewing the development,
any modernization to the legacy environment, so we have a
better understanding on how those investments fit into the
broader picture.
The proposed legislation--the revision to the section 2222
actually provides--we very much support. It provides greater
visibility into total investment for those systems. So it is
not just development modernization. It is the total investment.
So that we can, from in particular a perspective have a
better view of all of the investments to then drive both IT
rationalization, any changes that are made, any changes over $1
million to that business environment so that we can better
drive elimination of duplication from a legacy to an ERP, the
future, to look at duplication of existing systems across DOD.
So we very much support the draft legislation that has been
proposed.
Senator McCaskill. The reason I ask about the feeder
systems is I review all this. As I look at the plans and I look
at the ERPs, I am always on the watch for that moment in this--
I know we have some issues about all the things that are going
to happen all at once in some years and some of the Services in
2015 and 2016. I am realistic about whether there is going to
be a pushback on the 2017 number.
But what I am really worried about is we are going to get
to the end of this process, and they are going to say, ``Well,
there is the feeder system problem.'' That no one is going to
say, ``Well, that really wasn't my problem. That feeder system
wasn't my problem.''
I want to make sure that, right now, we know who to hold
accountable on the feeder system problem. Mr. Khan, could you
speak to that issue as to from where you sit can you make any
observations about who you think is the logical person to have
responsibility over all these feeder systems that are going to
ultimately either provide or not provide the ability for us to
get to an auditable system?
Mr. Khan. Feeder system is a huge problem because of the
data which comes in from the feeder systems has to be fed
eventually into the ERPs. So the data conversion would be an
issue.
I think that is critical that when investment decisions are
made for giving additional funding to a particular system or a
program, that it has to be looked at very carefully as to how
they are going to be linked with their transformation within
DOD itself.
One of the elements of transformation which is linked with
the business--or the enterprise architecture is how it is going
to address the legacy systems and the feeder systems. So that
is the point in time when the investment decisions are being
made that those hard questions have to be asked.
Senator McCaskill. Right.
Mr. Hale. Can I address that?
Senator McCaskill. Yes.
Mr. Hale. I think we--I am very worried about that, too. I
don't want to get all these systems deployed at great cost and
in considerable time find out we are not using them in the
right way or the feeders.
So what we have done is asked each Service--and the Army
has started, and I will ask Ms. Matiella if she will comment on
that--with these validations. We have taken--is it three bases
you are starting with?
Ms. Matiella. Yes.
Mr. Hale. We are actually asking an independent public
accountant to go out, look at GFEBS, which is their ERP.
Senator McCaskill. Right.
Mr. Hale. Say, ``Are we using it in a way to include the
feeder systems that is auditable?'' I suspect we are going to
have problems and that we will have to fix them, but at least
we are finding out now.
So do you want to add to that?
Ms. Matiella. Yes. As the auditors go onto a specific
installation, they look at GFEBS and the integrity of the data
and the processes in GFEBS. Of course, what that includes is
the data that came in.
So, as they come up with their recommendations and their
findings, it will include that data that came in from other
feeder systems. So, we will be alerted to the fact that it may
be that it is an HR feeder system or logistic feeder system
that may be creating a data integrity problem within GFEBS.
Of course, I am in charge of, to a large extent, making
sure that the end-to-end processes will end up in auditability.
For example, I am the process owner for procure-to-pay. So I
have to make sure that whatever goes through a procurement
system, in fact, does result in good, auditable data in the
end.
So, we are in the Army looking at end-to-end processes to
make sure that whatever goes into the accounting system, into
GFEBS, is auditable at that transaction level, does have
supporting documentation.
I work with the other Assistant Secretaries very, very
closely to make sure that they are working their systems to
make sure that in the end, the Army is successful in
auditability. So we are looking at things end-to-end.
Senator McCaskill. Okay, good.
Mr. Hale. We will do it with the Navy. I hope this year to
start one with the Navy ERP in the context of a major defense
acquisition program. As the Air Force's system matures, we will
do the same thing there.
Senator McCaskill. Okay, good. I just want to make sure
that we are prepared. Obviously, you are concerned about it,
Secretary Hale, for the right reasons.
It could be all of this effort and all of this money is
only as good as the data feed-in.
Mr. Hale. I might add, the processes that we use and the
training of the people, it is all a package.
Senator McCaskill. It is all included. Yes.
Mr. Morin. Madam Chairman?
Senator McCaskill. Yes?
Mr. Morin. Thank you, ma'am.
I wanted to highlight just one thing that I think is
important in the context of our overall business systems
modernization. It is that these new systems are much more
intolerant of bad data.
So, whereas the legacy systems have tolerated feeder
systems that have bad data, and it has skated sometimes below
the radar screen, with our implementation of DEAMS at Scott Air
Force Base, we found instances where feeder systems are
providing bad information in large quantities because the
business processes in those nonfinancial systems were bad.
But the system highlighted that for us directly. It told us
thousands of transactions were not meeting standards, which
instantly brought the level of management attention in order to
fix the problem. So there is an advantage to these new systems
in that we catch those problems.
Senator McCaskill. Yes, that is good. That is great. Thank
you for that.
Senate Ayotte.
Senator Ayotte. Thank you.
Ms. McGrath, I just wanted to ask you about something that
had happened. One of the Business Transformation Agency's
(BTA), largest initiatives is the Defense Agencies Initiative
(DAI), an ERP system for the defense agencies. BTA, in fact,
was the first agency to implement DAI for itself and, from what
we understand, was a small-scale effort but one that was very
successful in terms of following the best practices that we are
talking about today.
Now we have heard that as BTA is being shut down and about
half of that agency or so is being folded into your office,
that you are going to stop using DAI for your new business in
fiscal year 2012 and force the BTA folks that you are
inheriting to go back to the old, antiquated system supplied
out of DOD.
Is that what is happening? If so, why would we want to go
backwards when we have this new system that we have piloted?
Ms. McGrath. BTA was the first user, if you will, of the
DAI, which is the financial--ERP solution for the defense
agencies. There are other agencies who are also using the DAI
solution today and has a complete implementation schedule.
The OSD team, if you will, uses a legacy system called WAAS
today. Instead of having, I am going to say, my office on a
standalone system as part of the overall OSD footprint, we are
not moving toward implementation for just my office, but rather
moving toward implementation with the rest of OSD when we move
on to DAI. We are scheduled to implement DAI as part of OSD.
It is just I would not have my own office do it, whereas my
budget is rolled up into the overall OSD budget. So, I would be
the anomaly, if you will, and not standard with the rest of
OSD. So I guess my overall message is we are moving to DAI. We
are not doing it today because I am a component of the broader
OSD budget, but we are certainly aligned and on track to do
that.
Senator Ayotte. As the DCMO, you are leading the
transformation of business operations across DOD. What
problems, if any, have you had in convincing folks in DOD to
get on board and to start using the new system that has already
been up and running for a few years and is completely ready for
them to use? Are you having problems convincing DOD to use the
new system?
Ms. McGrath. I am sorry. Is your question specific to
utilization of DAI?
Senator Ayotte. Yes.
Ms. McGrath. So there is no problem convincing DOD, if you
will. The Washington Headquarters Services actually executes
the budget for OSD. We are on the implementation schedule for
DAI.
It is just more of a timing issue than a convincing them to
do that. So there is no, I will say, challenge in terms of the
business benefit for the solution. We will align to the rest of
the implementation, just like I would have otherwise before
the----
Senator Ayotte. But if you have folks that have already
used this system successfully, why are you farther down on the
list rather than farther up on the list?
Ms. McGrath. BTA--my office is an OSD element today. Before
any of the functions from BTA moved into my office, I today am
part of OSD. So, my budget today is done as part of the broader
OSD budget.
BTA, as a defense agency, used an ERP-based solution to do
their financials. So, with the disestablishment of the defense
agency, all of their systems, which they use to executive the
operations of their defense agency, aren't needed to run that.
Again, I am a member of the OSD element.
OSD is on a path to move to DAI. We are moving there. I am
just part of the implementation for OSD. So, I don't view it as
a challenge in terms of the business value. It is just a--it is
a timing----
Senator Ayotte. So when would----
Mr. Hale. Would I help if I made it clear, her office was
never on DAI. It was the agency that was on it. She will move
to it, along with all our offices, I hope, fairly soon. I can't
remember when it is scheduled.
Senator Ayotte. Right. So what is the timing then?
Ms. McGrath. I don't have it, I am sorry, off the top of my
head. I know it is not the beginning of fiscal year 2012. I
believe it is fiscal year 2013, but I would like to come back
and tell you what the very specific date is.
Senator Ayotte. I would appreciate that.
[The information referred to follows:]
The current implementation schedule for Defense Agencies Initiative
(DAI), for fiscal years 2012 through 2016, continues to include 25
Defense Agencies. The Office of the Deputy Chief Management Officer is
part of the Office of the Secretary of Defense (OSD), which is
currently supported by Washington Headquarters Service (WHS). WHS is
scheduled to begin implementation of DAI in fiscal year 2015 and become
operational in early fiscal year 2016. It did not make sense for DOD to
significantly alter the implementation schedule for DAI because of a
small number of Business Transformation Agency employees moving into
OSD.
Senator Ayotte. I just wanted to ask Mr. Khan. Overall, we
are going to have to make some tough choices around here, no
matter what the deficit plan that goes forward. It is going to
cause us to have to make some difficult choices across every
agency.
How sufficient is the quality of our financial data to
ensure that we are not making cuts that undercut our
warfighters or endanger readiness? Can you help us, just in
terms of where we are on the financial management end of when
we need to make these difficult decisions, how reliable is the
information we are going to receive?
Mr. Khan. Thank you for that question.
That question really goes to the heart of the importance of
a financial statement audit, which really trues up the internal
controls and the infrastructure which provides reliable
financial information.
So the challenge in answering your question is that without
having adequate internal controls, adequate processes, it is
difficult to say how reliable the information that we are
making decisions on. In part, it also touches upon some of the
other questions you had earlier on about information coming
from other areas, which feed into DOD, about the internal
controls, about how that information is processed, how that
information is reported.
So just want to link that to the importance of the
improvement in financial management infrastructure itself. The
proof of that is going to be successfully passing an audit,
which will give management comfort that the information that
they are using for decisionmaking is reliable.
It has reasonableness of having gone through internal
controls. It has the rigor of an audit. Even though you may not
be using the financial statements for making decisions, but the
information that goes into them, which is much more detailed,
that is reasonable, reliable.
Mr. Hale. May I add to that? Oh, go ahead.
Senator Ayotte. Sure. No, I thank you for that answer. Go
ahead, Mr. Secretary.
Mr. Hale. You have heard me say, and I believe it is true,
we have reasonable controls. We are not over there spending
this money wherever we want. If we were doing that, you would
get wholesale ADA violations. It is just not happening.
So I will use the colorful language of my former boss,
Secretary Gates. Maybe it was an Easter egg hunt to get the
information. But I guess he found the eggs because he made the
decision--and I am not trying to be silly.
In the end, I think we got him enough so that he felt
comfortable making those decisions in a way that wouldn't
damage the troops. He would never do that.
So it is not pretty. We need better financial systems. We
need audits. But we are not over there just randomly spending
this money. We are spending it the way you tell us.
I think we can establish that. In August, we will establish
it for our funds distribution process through an independent
auditor. I will go back to my ADA violations to say, overall, I
believe we have reasonable controls.
Senator Ayotte. One of, I think, the overall fears we have
is that we are in a position, if you are looking to 2017 and
the best scenario of being audit ready, we just don't want to
be in a position here where we are getting--instead of taking
the rotten eggs, we are taking the chocolate eggs, so to speak.
So, that is where we want to make sure that we are making
some good decisions. So, I appreciate your commenting on that,
and that kind of goes to the whole----
Mr. Hale. We share your concerns. We are heading towards
some difficult times. We need to work with you and with less
than perfect information, unquestionably. But I believe we can
make the right decisions.
Senator Ayotte. Thank you.
Senator McCaskill. Senator Portman.
I will let the witnesses know that we are planning on
having a vote at 4 p.m. So I am sure we will be able to wrap
this up by about 10 minutes after the hour.
Senator Portman.
Senator Portman. Thank you, Madam Chair. We have to stop
having these meetings together like this.
Senator McCaskill. I know.
Senator Portman. My chair on every committee.
Senator McCaskill. It is because you are a wonk, too.
Senator Portman. Yes. [Laughter.]
First of all, thank you all for being here. I appreciated
the comments from my colleague from New Hampshire, and your
answers to her.
I am sure that you have heard this today already, but we
think what you do is incredibly important. As some of you know,
I offered an amendment, which was later accepted, to ensure
that you all continue to have the stature that comes with being
a confirmed position.
Now that you are all in position, you probably think that
is okay. Maybe if you have to go through it again, you would
disagree with that. But, seriously, we really believed, as a
Congress, that it was important to hold you all up and to
empower you so that in dealing with other confirmed appointees,
you had the ability to ensure that financial management and the
critical roles you play were given adequate consideration.
With that comes a lot of responsibility, and we expect you
to utilize that full power that we were trying to empower you
with. When I was the OMB director, I met regularly with the
CFOs in the hopes of doing just that, empowering people,
letting them know that, at least in my role as OMB director, I
viewed what you do in the agencies as incredibly important.
I think what Senator Ayotte said is true. We are going to
be under enormous budget pressure here. So, it is more
important than ever. We want the money to go to our troops, and
we want it to be as efficiently and effectively spent as
possible.
That is going to be your job in a tight budget environment,
where there will be tremendous pressures on the budgets of
every one of the Services. So, with that in mind, let me ask a
couple of questions about accountability and specifically as it
relates to the audits.
I think Senator McCaskill and, I am told, Senator Cornyn
also raised this accountability issue earlier today. But
Secretary Hale, I saw in your prepared remarks, you talked
about the audit process, and you said, ``The department will
achieve its financial management goals only through the active
partnership involving both the Comptroller''--you--``and the
DCMO. We also have to have help from those in acquisitions,
logistics, other business areas as well as business communities
that reside in the department.''
You said you have ``engaged the department's CMO as well as
Military Department CMOs and the Service Vice Chiefs in a
personal commitment to support the goals.''
I am just, to be honest with you, a little concerned about
some of these terms. Active partnership? Help, engage, personal
commitment? It doesn't sound like a mission with a whole lot of
accountability and responsibility.
I thought that the whole point of having the CMO or at
least an identifiable leader, a single leader, who puts his or
her weight behind this problem and can hold people accountable,
was the intent of Congress.
I know Secretary Panetta has said this is a priority of
his. But again, from your comments, I get the sense it is going
to take more than just prioritization to make audits happen.
Can you speak a little to the accountability issue and how
we ensure that, at the very highest level, there is a
commitment to this and that someone is held accountable?
Mr. Hale. I think there is clear accountability. It starts
with the Secretary of Defense. But his focus is, he has so many
things to do. I think the CMO, who will be the Deputy Secretary
of Defense, Bill Lynn for the moment, is the primary
accountable official.
I meet weekly with him. I have discussed this issue a
number of times. We have had several formal meetings. But we
have to get this out farther than OSD. So, there has to be a
process. So we have set up one.
Beth McGrath and I chair a governance board, meets
quarterly, has the Service FMs there. So we get down to that
level. Also has many of the defense agency leaders. It has
senior representatives from acquisition, technology and
logistics, and from personnel. Increasingly, where we are going
with that FIAR governance board, as we call it, is kind of
stoplight charts of how we are doing on our various milestones.
Then there is a monthly meeting at a level down with my
Deputy CFO and the financial operations personnel in the
Services so that we get it a level down. This is a big
organization. No one person--Bill Lynn can't manage this day-
to-day. He just doesn't have time. I don't have enough time. I
can't devote all my time to it.
Senator Portman. I can't believe he has----
Mr. Hale. But he is responsible for it, and he understands
that.
Senator Portman. Yes. You think there is an understanding
of that and the accountability thing, how you talked about the,
in a sense, I guess, performance measures that you are using?
Then you have some green, yellow, and red lights, since you
said stoplights, attached to those. Do you feel like that is
something that, at the highest level, there is a commitment to?
Is there an alignment that people understand at Mr. Lynn's
level?
Mr. Hale. Yes. Maybe Beth wants to add to this. We have
monthly meetings of the Defense Business Systems Management
Group (DBSMG) and we review all the major priorities. This is
one of the top nine business priorities in DOD. There are
stoplight charts.
Is it perfect? No. Could we do better? I am sure we could.
But there is a commitment to this. I spent 7 years as the Air
Force FM. It is a whole lot different. There was no commitment,
frankly, at that point, no strong senior commitment.
It is going to get more senior because, obviously,
Secretary Panetta cares about this. I mentioned these
testimonies to him, and he is just busy with a lot of other
things. But I am scheduled to see him next week, and I will
give him an overview of where we are and get his personal
guidance.
Senator Portman. Tell him that the former OMB directors are
all relying on him.
Mr. Hale. Okay. [Laughter.]
Senator Portman. I am a former OMB director, too.
Mr. Hale. His heart is in the right place, and I am looking
forward to his help. Even if it is--just his support will be
very important, and just his stating that it is important will
be very important.
Senator Portman. Given your background, do you feel there
are enough green and yellow lights on your charts to indicate
that you are going to meet your 2017 date?
Mr. Hale. I am cautiously optimistic, but I know we have to
pick up the pace. You look at the timing, there is a lot toward
the end of that. We are going to have to find ways to move that
back in order to meet it.
I am more optimistic that we will meet these requirements
for the high-priority information. I know you weren't here, but
we have a plan that focuses on the information we most use to
manage, and we are focusing heavily on that. It is budgetary
information because we manage the Government, and certainly
DOD, by budgets.
Also, our accounts and availability of assets because they
are so critical to the warfighter. I am more confident that we
will meet it there because we are focusing heavily on it. But
we have an approach for full auditability, and as I say, I will
choose my words carefully, I am cautiously optimistic.
Senator Portman. Thank you all very much.
One quick final question and just a nodding of heads or
shaking of heads. How much time do you spend ensuring financial
standards--the CFO role--as opposed to just getting through the
budget process and preparing the budget? Do you all feel like
you have enough time to spend on the broader CFO role?
Ms. Matiella. Absolutely. We focus a lot on auditability,
as well as the budget. Basically, it is a long, long day, but
both things are important. We have to focus on both things, the
budget side and the accounting side.
So, I believe, not only does it have my attention as a
senior leader, but it has the attention of the CMO and the
Secretary of the Army and all the senior leadership. Definitely
accountability is there and ownership is there at many, many
levels.
Senator Portman. Good to hear.
Ms. Commons.
Ms. Commons. I spend a considerable amount of my time
focused on the auditability effort. By and large, the budget
process is one that has worked very well for us, and I can
spend a little less time focused on it. So I do spend a lot
more time focused on auditability.
As Secretary Hale said, I was also here in 1995 working as
the Principal Deputy, and certainly, there was no real senior
leadership focus on these issues. The senior leaders are really
focused on this issue now. They have given us the resources
that we need to make progress here.
Even the business owners are now aligned with us and
focused on improving our business processes. I believe that is
the key to sustainability for this effort. We are focused on
actually look at our business processes end-to-end,
standardizing those processes and making the changes that we
need in order to sustain this even when I leave as the
Assistant Secretary.
I believe that is the only way that we will become
auditable and keep that auditability forever.
Mr. Morin. Sir, I would also agree. The three priorities
that I am working pretty much every day are rebalancing the Air
Force budget to get the maximum combat capability out of each
taxpayers' dollar, the FIAR effort and the broader
transformation of our financial operations to have actionable
accurate information and quality service to the airmen who
depend on it, and then the reinvigoration of our cost-
estimating capability so that we make the right decisions on
our acquisition programs with the best possible information as
we make those long-term investment commitments.
Senator Portman. Thank you.
Mr. Khan, you are welcome to--I am over my time here. So
the chair is being very generous.
Mr. Khan. Maybe I can just comment on the commitment of the
leadership. We have been impressed by the current team. Like I
mentioned in my opening statement, I think the leadership is an
important element to have a plan in there to be able to sustain
it and to be able to work together across the different
functions.
Thank you.
Senator McCaskill. Thank you, Mr. Portman.
I just have two other areas I want to discuss and one of
them we may not have time to get time for and take for the
record. But the first is interfacing.
We have--one of the problems is that we can't take
commercial off-the-shelf systems because everybody wants to
hold onto the legacy systems, and then we have to like adjust
them and customize them to try to do interfaces. It is
expensive. It is very, very expensive.
GAO has looked at the data on the planned interfaces in the
ERP systems. I am a little surprised at how many interfaces are
planned. It is a huge number in every branch.
The winner goes to the Air Force, and so I am going to
focus this question for you and ask you to get back with an
answer. You all are planning on having an interface with your
system, the Expeditionary Combat Support System (ECSS), 157
interfaces in Phase 1, growing to 673 interfaces.
Now I don't know how you get to 673 interfaces. I can't
figure out why you would need to get to 673 interfaces. So I
would like you to look into that and get back to us with an
explanation and maybe a plan to reduce the number of
interfaces. Because the more interfaces you have, the more
unwieldy it is in terms of getting systems that work
efficiently and effectively that don't cost $5 billion to
develop.
Mr. Morin. Yes, ma'am. We will get back to you with details
on the interfaces that are involved.
[The information referred to follows:]
As the Expeditionary Combat Support System (ECSS) design has
matured, we have determined there are 141 currently planned interfaces
established for Increment 1. For Increments 2-4 we have identified 423
currently planned interfaces, for a total of 564 interfaces; this is an
update to the 830 as reported in the October 2010 GAO Report. This
number was revised during our May 2011 Government Accountability Office
audit. ECSS Increment 1 is projected to interface with over 30 discrete
systems, and each transmission of data to and from the ECSS application
is counted as an interface. For example, ECSS interfaces with the
Defense Communications Security Material System, a supply chain system
that requires 5 separate interfaces. Therefore, the 30+ systems that
ECSS interacts with are what creates the 141 data exchanges or
interfaces with ECSS Increment 1. The refinement of the number of
interfaces is a normal part of Enterprise Resource Planning design and
development activities. The Air Force will continue to eliminate or
consolidate interfaces as data needs are challenged and/or duplication
is uncovered.
Mr. Morin. I will say at a top level, and recognizing that
ECSS is a system to run essentially the entire logistics
enterprise of the Air Force. So it is a very broad all-
encompassing system.
But there is always a tradeoff in developing these ERPs
between do you make it truly the entire enterprise, thereby
doing away with lots of the interfaces, but accepting much more
development risk in building a more complicated system to
address different business processes? Or do you constrain the
size of that system, accept the need to build interfaces to
legacy systems, and all of the data interface problems that you
have alluded to earlier?
There is no one good answer there. But the process that we
have in DOD for looking at these systems and challenging those
sorts of assumptions that Ms. McGrath and Mr. Hale are very
intimately involved on, forces discussion on exactly those
design decisions.
Senator McCaskill. We need some kind of clarification. I
think all of you have 40, 50, 100 planned, but nobody has
anywhere near 657 planned. So we need to understand why there
is this wide disparity and why there are so many. Because it is
trouble. It is trouble to have that many interfaces. It is not
going to happen.
Now, finally, asset valuation. In the grand scheme of
public accounting and Government accounting and yellow book
standards, asset valuation has obviously been controversial and
difficult in terms of auditing and determining what asset
valuation is. I was there for the wars over asset valuation in
terms of infrastructure in State government.
So I know that, Mr. Hale, you have said that the asset
valuation, you are asking the Federal Accounting Standards
Advisory Board (FASAB) to change the Federal accounting
standards to prevent the expensing of military acquisition
costs.
I am curious what OMB and GAO, if they agree with this
approach. I would particularly like your input, Mr. Khan, about
what GAO thinks about the approach that DOD is recommending,
saying it is too expensive to get at some of the legacy aspects
in terms of valuation. We would just like briefly your input on
that.
Mr. Hale. Yes, briefly. We will ask--we haven't yet--but we
will ask the FASAB for military equipment, to allow us to
expense it. For other assets, we will pursue our waiver phased
approach.
We are going to wait until we get the statement of
budgetary resources because it feeds the information once it is
auditable. That will help. We need the ERPs, especially the
logistics ones, to do this.
Finally, we plan to do it only prospectively. That is, we
won't go back and try to figure out every building we ever
built. We will start with the ones that--which means that we
will get qualifications on our opinions for a while. But I
think it is a more effective use of the taxpayers' money.
Bottom line is we don't use it much to manage. It is of low
value, very low value, and very different than a private
company where asset valuation allows them to depreciate, and
they can use it to offset taxes. I don't pay any taxes. They
need the book values, especially if they were going to sell it.
I am not going to plan to sell the Pentagon.
It is just not information we use. So we need a cost-
effective way, and we think we found it. I did brief Mr. Dodaro
on this, and I believe he was generally supportive. I am not
going to sign him up to saying he would agree to everything.
But I believe he was generally supportive.
Senator McCaskill. Is OMB okay with it?
Mr. Hale. Say again?
Senator McCaskill. OMB okay with it?
Mr. Hale. Yes. We believe they are comfortable. I don't
have anything signed, and we will have to go through a formal
coordination process when we get to FASAB. But yes, we have
briefed Danny Werfel, and I believe he is generally supportive.
Senator McCaskill. Mr. Khan, do you want to let Mr. Dodaro
speak for GAO here, since his name has been brought up? I don't
want to put you in an awkward position where you state one
thing, and maybe Gene disagrees.
Mr. Khan. No, I don't. I wouldn't do that, speak for Mr.
Dodaro.
But essentially, in our discussions with Mr. Hale's office
and OSD, certainly we agreed with the current approach of
continuing with the existence and completeness of the mission-
critical asset. We feel that is going to provide important
information.
At the same time, we feel that maybe going to FASAB may be
premature. Going down the existence and completeness approach
may provide more information in the next few years, which may
impact what sort of standards you may really need to have to
address. Primarily, this is the issue of military equipment,
accounting for that, because that is largest part of the assets
which has different viewpoints of how that may be accounted
for.
The other point is that having the standards changed in the
near future is not really going to impact the auditability.
Because before going through existence and completeness,
valuation is going to be a stage after that.
Mr. Hale. We accept to wait a year or 2.
Senator McCaskill. Right. I understand.
Mr. Hale. We are going to focus on the higher-priority
stuff at the moment, as we are doing.
Senator McCaskill. I understand that. The vote has been
called. So we will close the hearing here. I will say that I
will look forward to an opinion, even if it is qualified. I
would be thrilled with a qualified opinion.
Mr. Hale. So, if we get a qualified opinion, we are going
to have a party. Will you come? [Laughter.]
Senator McCaskill. I think you can assume it will be a
qualified. I don't think that any of us are expecting a clean
audit the first time around.
Mr. Hale. But how about the party, Madam Chair? [Laughter.]
Senator McCaskill. I am just looking forward to an audit.
Thank you all for this hearing, and we will continue to
follow up and provide the pressure we think is necessary.
Thank you. We are adjourned.
[Questions for the record with answers supplied follow:]
Questions Submitted by Senator Kelly Ayotte
DEFENSE AUDIT READINESS
1. Senator Ayotte. Secretary Hale and Ms. McGrath, today, what are
the most significant impediments to making the Department of Defense
(DOD) auditable by the 2017 statutory deadline?
Secretary Hale and Ms. McGrath. DOD's legacy financial processes
and systems were established many years ago and were designed to ensure
budgetary accountability--not meet the proprietary or commercial
accounting standards called for in the Chief Financial Officer (CFO)
Act, which are necessary to achieve auditability. To meet these
standards, there is a substantial amount of work to be done. Some of
the most significant impediments include:
DOD business and financial management systems are not
fully integrated and do not always collect data at the
necessary transaction level.
Reliable end-to-end processes and internal controls
have not fully been defined to support financial reporting.
DOD lacks sufficient operational and financial
personnel experienced in financial audits.
DOD's traditionally stove-piped culture is primarily
focused on mission outcomes and does not yet place a
sufficiently high value on capturing and using financial and
cost information.
Significant cultural change is necessary to achieve
success.
2. Senator Ayotte. Secretary Hale and Ms. McGrath, exactly what
aspects of those impediments remain unaddressed in DOD's current
financial improvement and business transformation plans, if any remain
unaddressed?
Secretary Hale. All of these impediments--systems, processes,
workforce, and culture--are addressed through the Financial Improvement
and Audit Readiness (FIAR) Plan, as well as the Department's Strategic
Management Plan (SMP), Enterprise Transition Plan (ETP), and supporting
component business and financial management plans.
Ms. McGrath. All of these impediments--systems, processes,
workforce, and culture--are collectively addressed through the FIAR
plan, the Department's SMP, ETP, Business Enterprise Architecture (BEA)
and supporting component business and financial management plans.
Culture is also being addressed through many additional avenues, such
as communications, training, and accountability.
3. Senator Ayotte. Secretary Hale and Ms. McGrath, what, if
anything, can Congress do to help DOD overcome these unaddressed
obstacles, to ensure that it meets the 2017 statutory deadline?
Secretary Hale. Continued attention and oversight from Congress
encourages more attention and participation from the non-financial
management community to sustain the current focus. Additionally,
providing a timely appropriations bill without the use of multiple
continuing resolutions will help leaders devote more time to audit
readiness.
Ms. McGrath. Continued attention and oversight from Congress is
beneficial and encourages more attention and participation from the
entire DOD management community in sustaining the current focus on
auditability.
ENTERPRISE RESOURCE PLANNING SYSTEMS
4. Senator Ayotte. Secretary Hale and Ms. McGrath, over the last 5
years, how much per year and in total has DOD been applying towards the
development, procurement, and deployment of Enterprise Resource
Planning (ERP) systems?
Secretary Hale and Ms. McGrath. In order to provide the committee
with the most relevant number, we have taken a look at the available
information for all prior year funding for the ERPs listed in the GAO's
October 2010 report on DOD Business Transformation, GAO-11-53. These
ERPs are the Army's General Funds Enterprise Business System (GFEBS),
Global Combat Support System-Army (GCSS-Army), Logistics Modernization
Program (LMP), and Integrated Personnel and Pay System-Army (IPPS-A),
Navy's ERP, Global Combat Support system-Marine Corps (GCSS-MC), and
Future Personnel and Pay Systems (FPPS), the Air Force's Defense
Enterprise Accounting and Management System (DEAMS), Expeditionary
Combat Support System (ECSS), and Integrated Personnel and Pay System-
Air Force (IPPS-AF), and DOD's Defense Agencies Initiative (DAI). DOD
has applied approximately $7.2 billion towards the design, development,
procurement, test and evaluation, and deployment of these systems since
their inception.
5. Senator Ayotte. Secretary Hale and Ms. McGrath, please provide
the same information over the current Future Years Defense Plan.
Secretary Hale and Ms. McGrath. Based on available information, DOD
plans to apply approximately $6.2 billion towards the design,
development, procurement, test and evaluation, and deployment of the
systems identified in question #4 over fiscal years 2012 to 2016.
6. Senator Ayotte. Secretary Hale and Ms. McGrath, DOD has made it
clear that modernizing its business systems is central to its approach
to getting auditable. But, even when its new systems have begun to come
on-line, those entities are still not able to pass an audit. Why is
that, and what does that mean for the future of audit readiness?
Secretary Hale and Ms. McGrath. Modernizing DOD's business systems
is a key aspect of our overall effort to achieve auditability. However,
improved systems alone will not eliminate our weaknesses or guarantee
auditable statements. Achieving auditability requires that we apply
consistent levels of process controls that cross organizations and
functional areas. Many elements of our current business environment
must be changed to allow us to meet financial audit standards,
including improving the data quality of our feeder systems. So, while
DOD is taking pro-active steps to more closely tie individual ERP
programs with auditability outcomes, we are also focused on delivering
audit ready processes and controls that will remain outside the ERP
systems.
7. Senator Ayotte. Secretary Hale and Ms. McGrath, the Defense
Logistics Agency's (DLA) ERP system has been at full operational
capability (FOC) for several years and has been proclaimed as a major
success, but DLA is still projecting many years until audit readiness.
In fact, it looks like they'll be last in getting to audit readiness,
way out in 2017. That's more than a decade after the system reached
FOC. How is that possible?
Secretary Hale and Ms. McGrath. DLA has made great strides toward
full implementation of their ERP, Enterprise Business System (EBS). To
date, the EBS has been implemented for the non-fuels supply business
line, with great success. However, EBS has not been fully implemented
for the full range of business lines and processes needed for DLA to be
audit ready. Of particular note, the DLA audit readiness efforts are
impacted by two EBS programs that are extending the capabilities and
scope of EBS, EBS-Energy Convergence, and EBS-eProcurement.
Additionally, full implementation of EBS is not enough to ensure
that DLA is audit ready. Further corrective actions are necessary to
ensure that the process and control environments around the systems
(including at service providers) are compliant and sufficient to
withstand a financial statement audit. DLA must also develop more
complete documentation to achieve audit readiness. The DLA audit
readiness plan has always included these elements when projecting full
audit readiness.
8. Senator Ayotte. Secretary Hale and Ms. McGrath, how can DOD cite
the implementation of this ERP as a success given this reality?
Secretary Hale and Ms. McGrath. DOD considers the implementation of
EBS a success because it has dramatically improved processes and
controls in the non-fuels supply business. Auditability for the entire
DLA likely will be achieved, as described in the previous answer, when
further process and control improvements are made and additional ERP
functionality is fully implemented.
9. Senator Ayotte. Secretary Hale and Ms. McGrath, what does this
mean to all the strategies in the FIAR plan that says these new systems
are so essential to audit readiness; but, here, your best one has
already been up-and-running for years and audit readiness is still many
more years away?
Secretary Hale and Ms. McGrath. As explained in the answer to
question #7, the DLA ERP has been implemented for the supply business
line but not for the full range of business lines and processes needed
for the entity to be audit ready. The DLA audit readiness plan has
always included these material elements of the business when projecting
full audit readiness. We continue to work with all DOD components to
improve all material parts of their business operations to achieve
audit readiness as soon as possible and within the goals established in
legislation.
10. Senator Ayotte. Secretary Hale and Ms. McGrath, exactly what
evidence do you have that any of the new systems that are being
implemented and integrated with legacy systems will in fact yield an
auditable result?
Secretary Hale. Each of the system acquisition programs has
included the requirements of the Federal Financial Management
Improvement Act (FFMIA) in the system requirements. Testing of these
requirements are part of the system acceptance process. These tests
give us confidence that the software is largely audit ready.
Additionally, DOD is more closely tying business and financial
management outcomes with specific acquisition milestone decisions,
which provides us additional confidence that at each step of the
acquisition process, we are ensuring that they will yield the results
that we desire.
However, the new systems cannot achieve audit readiness on their
own. They must be well-integrated with many other systems to create a
well-controlled end-to-end business process. Many elements of the
larger business environment, including processes and controls, must
also be changed to allow us to meet financial audit standards.
Ms. McGrath. Each of the system acquisition programs has included
the requirements of the FFMIA in the system requirements. Testing of
these requirements are part of the system acceptance process.
Additionally, my office has begun an independent assessment of every
ERP and business system that needs to be compliant with SFIS and USSGL.
These reviews look at the underlying system's SFIS configuration, its
USSGL posting logic, its ability to interface using SFIS, and its
financial reporting capability. These tests give us confidence that the
software is largely audit ready. Additionally, DOD is more closely
tying business and financial management outcomes with specific
acquisition milestone decisions, which provides us additional
confidence that at each step of the acquisition process, we are
ensuring that they will yield the results that we desire.
However, the new systems cannot achieve audit readiness on their
own. They must be well-integrated with many other systems to create a
well-controlled end-to-end business process. Many elements of the
larger business environment, including processes and controls, must
also be changed to allow us to meet financial audit standards.
11. Senator Ayotte. Secretary Hale and Ms. McGrath, have you tested
any of these systems from the perspective of a financial audit? If yes,
exactly what have you learned? Please be specific.
Secretary Hale and Ms. McGrath. The FFMIA testing we described in
the answer to question #10 covers many of the requirements of a
financial statement audit. While we have learned a few lessons from
this testing, it is the ongoing testing of the end-to-end processes
that include the ERPs where we will learn valuable lessons. Right now,
an Independent Public Accounting (IPA) firm is examining the Army's
target business environment with a report expected by late November. We
have a similar evaluation planned to begin for the Navy target
environment in the first quarter of fiscal year 2012.
12. Senator Ayotte. Secretary Hale and Ms. McGrath, we are
concerned that DOD is spending billions of dollars on new state-of-the-
art systems but in the end these systems will not be able to provide it
with the compliant processes and adequate controls needed to achieve an
audit opinion. I understand DOD has a BEA that is suppose to include
the business rules for end-to-end processes to include standard data
elements and controls. So, why is DOD still implementing ERPs that are
not auditable?
Secretary Hale. BEA provides a foundation of requirements for
implementation of sound business practices. Improved systems alone will
not eliminate our weaknesses or guarantee auditable statements.
Achieving auditability requires that we apply a consistent level of
process controls that cross organizations and functional areas. Many
elements of our current business environment must be changed to allow
us to meet financial audit standards. We have every reason to believe
that the ERPs themselves are auditable and as described in the answer
to question #11 we have engagements with accounting firms to evaluate
the state of audit readiness in Army and Navy entities using the ERPs
as core parts of their business environment.
Ms. McGrath. The BEA provides a foundation of requirements for
implementation of sound business practices. Compliance to the BEA
includes the ability of reporting entities to implement necessary
internal controls. business rules and standard data elements, and the
successful implementation of systems to support these internal
controls. However. many of the ERP programs that the Military
Departments are currently implementing were initiated prior to the
development and refinement of the BEA, so in some cases we are forced
to make incremental improvement to the systems to bring them in line
with the standards that are included in the BEA. To increase the
validation of key enterprise data standards/requirement, DOD is
conducting independent assessments of each ERP and business system that
needs to be compliant with SFIS and USSGL and is taking remedial action
where deficiencies are identified.
13. Senator Ayotte. Secretary Hale and Ms. McGrath, why is DOD
buying ERPs without deliverables for ensuring these systems can pass an
audit?
Secretary Hale and Ms. McGrath. The implementation of ERPs is a
central part of our business systems modernization strategy because the
design principles within an ERP directly enable key elements of
auditability. Among those principles, ERPs are designed to handle
transactions end-to-end, enforce process and execution standardization
among implementing organizations, manage consolidated business data in
a single repository that allows centralized access control, and
facilitate the flow of information both within an organization and with
outside stakeholders. These design principles within an ERP directly
enable these capabilities essential to auditability:
Traceability of all transactions from source to
statement
The ability to recreate a transaction
Documented, repeatable processes and procedures
Demonstrable compliance with laws, regulations, and
standards
A control environment that is sufficient to reduce
risk to an acceptable level
Additionally, we are ensuring that all of our ERP programs are
accountable for delivering systems compliant with the standards
necessary to achieve an audit such as the Standard Financial
Information Structure (SFIS) and others captured in the BEA. We are
validating this compliance through onsite audits. As part of each
audit, we look at the underlying system's SFIS configuration, its USSGL
posting logic, its ability to interface using SFIS, and its financial
reporting capability. DOD is also tying business outcomes to
acquisition milestones and specifically requiring, in Acquisition
Decision Memoranda, that individual programs, such as Army's GFEBS and
Navy ERP, define the role that they play in their organizations'
auditability efforts and end-to-end processes. However, improved
systems will not eliminate all of our weaknesses nor guarantee
auditable statements alone. Achieving auditability requires that we
apply a consistent level of process controls across organizations and
functional areas. DOD's senior leadership understands this and is
committed to achieving our audit goal.
14. Senator Ayotte. Secretary Hale and Ms. McGrath, what, if
anything, is DOD doing to ensure all new systems and ERPs are compliant
with the BEA and that the BEA is compliant with accounting and auditing
standards?
Secretary Hale and Ms. McGrath. DOD is doing many things to improve
the content and quality of the BEA and the BEA compliance process.
Currently, the BEA captures and maps all applicable laws, regulations,
and policies to a framework of 15 end-to-end processes. Our existing
policies require all business systems and services to document their
solution compliance to the business architecture via a self-assertion
process. In order to validate the self-assertion for compliance with
the SFIS and USSGL, we are conducting an independent assessment for
every system involved. This assessment ensures compliance with the
standards and adoption and enforcement of the business rules, elements,
and usage. For an ERP, this equates to approximately 250 business rules
that will be evaluated. In addition to checking for compliance, DOD
initiated a plan to improve the usability of the BEA by adopting open
semantic standards that allow for machine readable discoverability of
applicable rules and standards. This change will ensure systems and
processes are aware of all applicable standards in addition to
providing a substantially improved compliance process.
15. Senator Ayotte. Secretary Hale and Ms. McGrath, what
improvements, if any, can be made in this area?
Secretary Hale and Ms. McGrath. DOD continues to take steps to
ensure all new systems are compliant with the BEA and that the BEA
sufficiently documents all appropriate accounting and auditing
standards. First, DOD is evolving and improving the underlying
technology and methodology of the BEA and the business solution
architectures. The next version of the BEA will be based upon non-
proprietary, open-standards that provide the ability to validate
compliance in an automated machine readable fashion. DOD has also
directed business system and business solution architectures to adopt
these same languages and symbols. This standards-based approach will
allow the solutions to leverage the BEA directly and the enterprise to
directly access solution architectures. As a result of this evolution
and common language, DOD will be able to more effectively guide for
investments within a portfolio and ascertain impacts of business
process and rule changes on systems and data.
Second, we are taking steps to rationalize our current portfolio of
investments. Within the procure-to-pay end-to-end process, we have
identified and categorized legacy, interim, and target systems by
function, activity, and cost. We have also documented transition dates,
overlapping capability, and termination dates of these systems. This
information is available to the Investment Review Board (IRB) to
provide transparency and enable rationalization of systems and
services.
Third, we plan to increase independent BEA compliance assessments
leveraging lessons learned during the SFIS validation and those learned
by the Real Property and Infrastructure Lifecycle Management IRB, which
is a leader in validating compliance. Independent assessments in
addition to self-assessments will provide a much higher-level assurance
that systems and organizations are complying with the BEA.
16. Senator Ayotte. Secretary Hale and Ms. McGrath, one of the big
obstacles to DOD's ability to become auditable by 2017 relates to its
feeder systems--in particular, the fact that the data that supports
their use is many times configured differently from how they should be
for them to communicate effectively with the core ERP systems. This
frustrates DOD's ability to get reliable information into the overall
system (they have to be inputted manually and that creates errors) and
to reengineer its business processes in a way that allows the ERPs to
work as intended--to facilitate auditability. Do you recognize that
concern? If so, how is DOD addressing it?
Secretary Hale and Ms. McGrath. Yes, we recognize the concern.
Interoperability between core ERPs and associated systems challenges
DOD's ability to reach its auditability and efficiency goals. DOD has
adopted a framework of 15 end-to-end processes that facilitates the
ability to document and describe the processes and the data required by
DOD to conduct business. As DOD improves its ability to describe the
data and processes using machine-readable open standards, we expose
obstacles and address them as part of our continuing efforts to
rational IT investments. We are also using the end-to-end framework to
identify business process reengineering (BPR) opportunities within a
portfolio versus an individual system. For example, DOD recently
initiated a project to provide a common service for contract clause
validation within the enterprise vice multiple individual system
solutions.
17. Senator Ayotte. Secretary Hale and Ms. McGrath, what
improvements, if any, can be made in this area?
Secretary Hale and Ms. McGrath. DOD has adopted a framework of 15
end-to-end processes that facilitates the ability to document and
describe the processes and the data required to conduct our business.
As DOD improves its ability to describe the data and processes using
machine readable open standards, we expose obstacles and address them
as part of our continuing efforts to rational IT investments. This will
help to improve data quality across our end-to-end processes,
regardless what system it resides in. We are also using the end-to-end
framework to identify BPR opportunities within a portfolio versus an
individual system. For example, DOD recently initiated a project to
provide a common service for contract clause validation within the
enterprise vice creation of multiple individual system solutions.
DEFENSE FINANCE AND ACCOUNTING SERVICE
18. Senator Ayotte. Secretary Hale and Ms. McGrath, the Treasury
performs financial transactions on behalf of other Federal agencies.
With the adoption of the new ERP systems, it seems that these brand-new
systems could communicate directly with the Treasury and bypass the
Defense Finance and Accounting Service (DFAS). We understand that an
Army system is undergoing a pilot to look into the viability of this
approach. We are interested in the idea that we can reduce the DFAS
footprint and direct any savings realized into both increased
capability for our military and, possibly, debt reduction. In your
view, to what extent can the Treasury perform at least some of the
financial functions that DFAS is now performing?
Secretary Hale and Ms. McGrath. The Army is using the GFEBS to
pilot/test the feasibility of making payments directly from the
Treasury to the payee, replacing many of the payment processes and
systems currently employed by DFAS today. However, it is too early to
estimate potential savings that could result from the pilot and what
DFAS functions could be replaced by GFEBS in conjunction with Treasury
disbursing. As part of DOD's audit readiness efforts, we will continue
to evaluate this effort and determine whether it can potentially
replace some DFAS processes and systems.
19. Senator Ayotte. Secretary Hale and Ms. McGrath, are you aware
of any business case that supports having the ERPs communicate directly
with the Treasury for financial transactions, bypassing DFAS? If so,
please explain. If not, do you intend to conduct that business case
analysis? If so, when?
Secretary Hale and Ms. McGrath. As explained in the answer to
question #18, the Army is using the GFEBS to pilot/test the feasibility
of making payments directly from the Treasury to the payee, replacing
many of the payment processes and systems currently employed by DFAS
today. There is a planned 6-month evaluation period at the conclusion
of the pilot. This will include a full Cost-Benefit Analysis and
Business Case. These will be used to determine if the Army should go
forward with implementing the Treasury disbursing capability Army-wide.
20. Senator Ayotte. Secretary Hale and Ms. McGrath, is leadership
at DOD waiting for the result of the pilot effort with the Army
financial ERP GFEBS before approving it?
Secretary Hale and Ms. McGrath. DOD has approved the current GFEBS
baseline for full deployment and, as explained in the answers to
questions #18 and #19, has approved the Army to use GFEBS to pilot/test
the feasibility of making payments directly from the Treasury to the
payee. There is a planned 6-month evaluation period at the conclusion
of the pilot. The results of this evaluation will be used to determine
whether these additional capabilities should be integrated in the
current GFEBS baseline and deployed throughout the Army. The results of
the pilot will be shared DOD-wide.
21. Senator Ayotte. Secretary Hale and Ms. McGrath, why would an
extensive pilot be needed for a brand-new ERP system?
Secretary Hale and Ms. McGrath. The complex nature of the business
operation involves multiple processes with linked outcomes. A change in
a particular process often affects related process, data flows, and
systems. There are business process differences between how DOD
currently conducts disbursement as compared to the Treasury and a
phased approach is prudent to ensure there are no unintended
consequences on reconciliation and reporting. We feel it is necessary
to assess the impacts in a microenvironment before prematurely rolling
out an enterprise solution.
22. Senator Ayotte. Secretary Hale and Ms. McGrath, other agencies
have ERPs that communicate directly with the Treasury. Could your
analysis leverage those experiences to possibly field this solution
more quickly?
Secretary Hale and Ms. McGrath. DOD has consulted with other
agencies on their experiences and has benefited from their lessons-
learned. Among other examples, the Army has held extensive discussions
with Customs and Border Protection (CBP) about the business processes
and the efficiencies that agency gained by disbursing directly through
Treasury. The Army is leveraging CBP's experience while implementing
the Army's ERP. In addition, DOD has been represented in ERP users
groups sponsored by the Office of Management and Budget's (OMB) CFO
Council, providing other opportunities to leverage non-defense agency
experience.
23. Senator Ayotte. Secretary Hale and Ms. McGrath, please provide
a rough order of magnitude of how much could be saved--in terms of
dollars and personnel--by this approach vis-a-vis DFAS?
Secretary Hale and Ms. McGrath. That information is not yet
available. The extent of potential savings is part of what the Army's
pilot/test is trying to assess. For the Treasury disbursing capability,
it is the Army's belief that by eliminating and streamlining processes
and systems, the Army will generate cost savings within DOD and also
enhance the likelihood of achieving audit readiness. However, specific
figures are still being determined.
24. Senator Ayotte. Secretary Hale and Ms. McGrath, the Navy ERP is
nearly fully deployed. Is it transacting financial payments direct to
the Treasury? If not, why not?
Secretary Hale and Ms. McGrath. No, the Navy ERP system is not
transacting payments to the Treasury. Depending on the results of the
ongoing pilot/test, Navy ERP may move in that direction.
FINANCIAL IMPROVEMENT AND AUDIT READINESS PLAN
25. Senator Ayotte. Secretary Hale, I have reviewed what you have
described as Interim Goals for fiscal year 2011 and fiscal year 2012 in
your FIAR plans. With the exception of one goal for fiscal year 2011
(``Achieve audit opinion on USMC'') and one goal for fiscal year 2012
(``fully deploy GFEBS''), all the others are, in fact, not goals. They
are a list of tasks to ``begin'' or for DOD to ``assert'', which only
begins the audit process. As of today, what is the status of your goals
for fiscal year 2011 and fiscal year 2012; as of today, will they be
met? If so, please specify when.
Secretary Hale. DOD has set aggressive stretch goals in order to
push the organization to meet the goal of audit readiness by September
2017. Since publication of the May FIAR plan Status Report, we have
completed six of the eight fiscal year 2011 goals depicted in Figure 7
of the May 2011 FIAR plan Status Report. An independent accounting firm
issued a clean opinion on the audit readiness examination of the Army,
Navy, and Air Force appropriations received assertions. The IG has
begun an examination of the Navy military equipment and accounting
firms have begun the examinations of Army entities using GFEBS and Air
Force Funds Balance with Treasury reconciliation.
We will not meet all interim goals and our performance in fiscal
year 2012 remains to be seen. I have reason to be confident that we can
continue to build on the momentum we have developed in fiscal year
2011.
26. Senator Ayotte. Secretary Hale, why are your goals listed as
beginnings or assertions instead of when these tasks will be complete?
Secretary Hale. We have developed a methodology for audit readiness
that addresses many lessons from our earlier efforts. The recent GAO
audit (http://www.gao.gov/Products/GAO-11-851) reviewed our methodology
and reports that ``DOD's FIAR Guidance provides a reasonable and
systematic process that DOD components can follow in their efforts to
achieve audit readiness. It establishes clear priorities for the
components and a road map for reaching auditability.''
One key part of the process is for the DOD IG and my office to
review assertions of audit readiness before beginning a more detailed
examination. As also reported in the GAO audit, this review is not a
rubber-stamp process and has more often than not determined the
component must perform additional work before beginning the external
validation. So we consider the beginning of the external validation to
be a significant milestone. While not all examinations will result in a
clean opinion we feel that the components are more likely than not
audit ready when the examination begins.
27. Senator Ayotte. Secretary Hale, please provide me with a list
of when the fiscal year 2011 and fiscal year 2012 tasks are expected to
be complete--and not merely begun.
Secretary Hale. We plan to complete validations of audit readiness
assertions within 6 months. Several of these early efforts were delayed
while we established a contract vehicle for the work. Since publication
of the May FIAR plan Status Report, we have completed validations
related to three of the fiscal year 2011 goals in Figure 7 of the
report, the independent validation of the Army, Navy, and Air Force
appropriations received assertions. Three of the other four ``begin
validation'' goals have also been met and all four validations will be
complete in fiscal year 2012. The latest status on all fiscal year 2011
and fiscal year 2012 goals will be reported in the November 2011 FIAR
plan Status Report.
28. Senator Ayotte. Secretary Hale, wave 1 of your strategy for
financial readiness is for there to be an audit of ``Appropriations
Received''. Isn't that basically just making sure that the
congressional appropriations got into the right accounts?
Secretary Hale. Yes, this first phase of our effort is to prove
that DOD accurately accounts for and distributes funds provided by
Congress into the right accounts in accordance with law. While funds
receipt and distribution is a simple process relative to some other DOD
processes such as weapon system acquisition, it is an important step
for two reasons. First, we want to have independent validation that we
receive and distribute funding in accordance with the law to provide
Congress confidence. We also want to get our components more experience
with the rigors of audit and this was a good early exercise of their
ability to meet audit documentation requirements.
29. Senator Ayotte. Secretary Hale, this sounds simple; why is it
that none of the Services--the Departments of the Army, Navy, or Air
Force--can do that simple task yet?
Secretary Hale. We always had confidence that the Services could
pass this test and in August, an IPA firm completed its examination and
issued unqualified (``clean'') opinions to the Army, Navy, and Air
Force on their Appropriations Received audit readiness assertion. These
clean opinions validate that the Military Departments have reliable and
auditable processes, controls, and systems in place to record the
annual appropriations from Congress.
30. Senator Ayotte. Secretary Hale, why shouldn't Congress be
alarmed that the simple task of depositing the right money into the
right accounts before even spending it cannot now be verified by
independent auditors?
Secretary Hale. Congress should be confident that we use
appropriations in accordance with the law and we now have it verified
by an IPA firm. In August, an IPA firm completed its examination and
issued unqualified (``clean'') opinions to the Army, Navy, and Air
Force on their Appropriations Received audit readiness assertion. These
clean opinions validate that the Military Departments have reliable and
auditable processes, controls, and systems in place to record the
annual appropriations from Congress.
31. Senator Ayotte. Secretary Hale, exactly how is that objective
necessary for achieving full audit readiness?
Secretary Hale. Accurate and timely recording of appropriations and
other related budget activity is critical as it is the focus of the
first third of the Statement of Budgetary Resources (SBR). If the
resources received are not recorded accurately then all remaining
sections of the SBR will be inaccurate.
32. Senator Ayotte. Secretary Hale, according to the most recent
FIAR plan, this was supposed to have been completed in fiscal year 2010
for the Navy and fiscal year 2011 for the Army and the Air Force. But,
they have all been moved to fiscal year 2012. Please explain why.
Secretary Hale. In the May 2011 FIAR plan Status Report, we
reported the validations of Army, Navy, and Air Force Appropriations
Received audit readiness assertions would be complete in the fourth
quarter of fiscal year 2011 and, in fact, they were completed. In
August, an IPA firm completed its examination and issued unqualified
(``clean'') opinions to the Army, Navy, and Air Force on their
Appropriations Received audit readiness assertion. These clean opinions
validate that the Military Departments have reliable and auditable
processes, controls, and systems in place to record the annual
appropriations from Congress.
There was a delay to the Navy milestone while we contracted with
IPA firms to do this work at the best value to the Government.
33. Senator Ayotte. Secretary Hale, I am concerned that DOD has too
much of a budget focus and not enough of a focus on what they are
spending the $700 billion Congress has given them. We know DOD spends
enormous resources putting together a budget and justifying the need.
We know the management focus is on spending all of the funds we approve
for fear of not getting to keep the same level of funding going
forward. Now, for the approach to getting to an unqualified audit
opinion, DOD is focusing on the SBR--once again a budget focus. Why is
DOD not focusing on the balance sheet so we can improve the quality of
data captured on what we are buying? It would seem wiser to be focused
on the end-to-end business transactions that encompass both the
budgetary and proprietary general ledger account postings.
Secretary Hale. DOD's major financial decisions are based upon
budgetary data (e.g., status of funds received, obligated, and
expended). Therefore, the first priority focuses on process
improvements, controls, and systems associated with budgetary
information. This effort involves ensuring improved quality of
information in order to better inform decisions--not just to ensure the
funds are spent. Fiscal pressure and good stewardship demand this. The
budget is key to public sector accounting. Proving positive control
over each business event in the end-to-end process provides the
framework for the rest of the statements. With modern, capable systems,
business events are posted to both proprietary and budgetary ledgers.
Our revised strategy to focus on budgetary information and asset
counts/locations has resulted in more participation from the non-
financial business communities. They are active in our efforts to
improve controls over asset management as well as ensuring that
obligations are recorded and adjusted when needed. This approach has
also been validated by GAO and advisory bodies.
34. Senator Ayotte. Secretary Hale, doesn't managing to the budget,
as the SBR does, focus the FIAR effort mostly on funding in and funding
obligated and expended, where Congress wants DOD to focus additionally
on what it is buying so it can analyze its buying decisions and the
costs of programs, as Secretary Gates complained about?
Secretary Hale. By focusing first on budgetary data, we will
improve processes, controls, and systems we use to manage DOD budgets,
appropriations, funds availability, and expenditure information--which
are critical to effectively managing operations and acquisitions. The
type of cost or managerial accounting you refer to in your question is
dependent on a basis of accurate financial accounting. We are focused
on building that solid foundation while also looking to improve cost
accounting.
35. Senator Ayotte. Secretary Hale, are you focusing on the SBR
because you lack the people who understand the proprietary side of the
accounting processes and systems?
Secretary Hale. We have some of the finest people in Government.
They are experienced, trained, and dedicated. We have an extensive
training program to ensure our financial managers know the proper rules
and processes. However, they generally do not have financial audit
experience. That is changing. We have hired people from the outside,
employed contractors, and developed an audit readiness training
program. My certification plan that is included in the House and Senate
versions of the NDAA of 2012 will institute the skills we need moving
forward.
36. Senator Ayotte. Secretary Hale, it seems you are more
comfortable with the budget processes. Does DOD have enough individuals
with experience auditing complex financial statements?
Secretary Hale. Our people are experienced, well-trained, and
dedicated; but they generally do not have financial audit experience.
We are working to add this experience through actual audits and
examinations, interaction with experienced auditors helping our audit
readiness efforts, training, and through hiring.
37. Senator Ayotte. Secretary Hale, I understand that you are
sponsoring an accreditation program before Congress to increase the
number of government employees holding a CPA certification. I applaud
this initiative, but how concerned are you that even under the
initiative, the workforce within DOD will not be trained quickly or
sufficiently enough to achieve a first-time audit opinion by 2017?
Secretary Hale. The 2017 goal is ambitious from a variety of
perspectives but we are committed to this date. I hope you will
continue to encourage and support this workforce initiative and others
which will help us to not only achieve but also sustain auditability in
the future. Our intended business environment, as well as external
pressure to do more with fewer resources, will demand that our
workforce has the right skills. Increased requirements for credentials
will be part of this emerging program.
38. Senator Ayotte. Secretary Hale, how critical is this as a
limiting factor?
Secretary Hale. Our people's experience is a critical factor but no
single factor will result in success. We believe we have a strategy and
approach that addresses all factors sufficiently. Inclusion of FIAR
goals as a requirement in performance plans and organization strategic
plans will also help motivate our people to get the skills they need to
succeed and be rewarded.
OVERSIGHT OF BUSINESS SYSTEMS MODERNIZATION
39. Senator Ayotte. Ms. McGrath, you are the vice chair of the
Defense Business Systems Management Committee (DBSMC), which has been
in existence for more than 5 years now. The statute that authorized the
DBSMC requires oversight of enterprise architecture and business system
modernization efforts across DOD. These ERP systems appear to be at the
heart of those modernization efforts, both for audit readiness and
other important reasons. Exactly what kind of oversight has the DBSMC
provided over these ERP programs?
Ms. McGrath. The DBSMC has provided consistent oversight over DOD's
ERP investments. In addition to responsibility for reviewing and
approving the ERP programs' funds certification requests, the DBSMC has
played an active role in defining DOD's overall strategy with regard to
these programs, authorizing and reviewing the results of pilot efforts,
such as the Procure-to-Pay pilot, to investigate ways to make better
use of the capability inherent in the ERP software packages, and
holding component leaders responsible and accountable for the
performance of their programs.
40. Senator Ayotte. Ms. McGrath, how often, and specifically how,
do you personally verify that the Services are building ERPs in a way
that is compatible for the Office of the Secretary of Defense (OSD) and
other users to undertake cross-Service search for financial, human
resources, or supply information?
Ms. McGrath. I am personally involved in ensuring that the Services
are building ERPs in a way that is compatible for OSD and other users
to undertake cross-Service search for financial, human resources, or
supply information in a number of ways. As Vice Chair of the DBSMC, a
key member of our IRBs, and Milestone Decision Authority of many of the
Service ERPs, I ensure that they are being built in compliance with the
BEA, which contains the data and process standards that provide for
information interoperability. Additionally, my office, through our ERP
laboratory, provides the Services with standard configurations of the
major ERP software packages that facilitate Service-specific
implementation of the BEA standards. Finally, my office is leading
efforts to further improve the BEA and develop innovative technology
approaches for business intelligence and analytics.
41. Senator Ayotte. Ms. McGrath, please provide me with a
description of which ERPs the DBSMC reviewed in detail and the dates
when the DBSMC conducted those detailed reviews.
Ms. McGrath. Since the DBSMC was established in 2005, in addition
to considering certification requests for DOD's ERP systems, it
specifically reviewed DOD's overarching ERP strategy, Procure-to-Pay
End-to-End process pilot efforts, and its individual ERP investments
many times. With regard to the individual ERP programs, the DBSMC's
reviews included the Defense Integrated Military Human Resources System
(DIMHRS), Defense Agencies Initiative (DAI), Navy Enterprise Resource
Planning System (Navy ERP), the Air Force's Defense Enterprise
Accounting and Management System (DEAMS) and ECSS, the Army's GFEBS,
GCSS-Army, and LMP, and the DLA's Enterprise Business System (EBS).
These reviews took place on the following dates:
April 29, 2005;
June 5, 2005;
July 27, 2005;
August 31, 2005;
September 28, 2005;
October 25, 2005;
December 1, 2005;
December 21, 2005;
January 25, 2006;
March 23, 2006;
April 13, 2006;
May 19, 2006;
July 26, 2006;
August 23, 2006;
September 22, 2006;
November 30, 2006;
December 21, 2006;
January 31, 2007;
February 22, 2007;
March 29, 2007;
May 22, 2007;
June 25, 2007;
July 23, 2007;
August 17, 2007;
September 26, 2007;
October 26, 2007;
November 27, 2007;
December 21, 2007;
February 1, 2008;
February 28, 2008;
April 3, 2008;
April 29, 2008;
July 24, 2008;
August 21, 2008;
September 24, 2008;
October 30, 2008;
December 5, 2008;
January 14, 2009;
February 24, 2009;
March 30, 2009;
April 30, 2009;
July 21, 2009;
February 2, 2010;
March 2, 2010;
June 1, 2010; and
November 10, 2010.
42. Senator Ayotte. Ms. McGrath, with this information, please
briefly describe the matter reviewed in a level of detail for me to
understand the nature of these detailed reviews.
Ms. McGrath. The reviews listed in the answer to question #41 vary
greatly, but can be grouped into a number of general categories. First,
the DBSMC has received a number of broad program overviews,
particularly in the months following the creation of the DBSMC in 2005,
to introduce the DBSMC members to a particular program. Second, the
DBSMC has received program updates throughout programs' acquisition
lifecycles to stay informed about progress and share lessons learned
across DOD. These updates generally would be composed of broad looks at
cost, schedule, performance, and risk factors. Third, the DBSMC has
conducted in-depth reviews on particular programs or individual issues
associated with particular programs. The subjects of these in-depth
reviews vary, but include issues such as interfaces, data conversion,
implementation/roll-out, change management, et cetera. Fourth, the
DBSMC has received decision briefs on ERP programs or strategies that
present potential courses of action for the group's consideration and
decision. Finally, the DBSMC has received a number of follow-up
briefings to answer members' questions from a previous meeting or
present the status of actions assigned at previous meetings.
43. Senator Ayotte. Ms. McGrath, most of the business systems DOD
has bought are over-budget and have gone long past scheduled delivery.
The Government Accountability Office (GAO) puts those numbers in the
billions of dollars on the budget side, and most of these programs have
had to go through the so-called ``Critical Change Process (CCP)'' with
reports to Congress because they breached on execution targets. Exactly
what specific changes has the DBSMC prescribed for each of these over-
budget programs to get them under control?
Ms. McGrath. The senior official, typically the component
acquisition executive, within the acquisition chain of command is
responsible for certifying programs in accordance with CCP described in
10 U.S.C., Chapter 144a, not the DBSMC. As part of the CCP the senior
DOD official responsible for the program provides written certification
(with supporting explanation) that:
the automated information system to be acquired is
essential to the national security or to the efficient
management of DOD;
there is no alternative to the system which will
provide equal or greater capability at less cost;
the new estimates of the cost, schedule, and
performance with respect to the program and system or
information technology investment, as applicable, have been
determined with the concurrence of the Director of Cost
Assessment and Program Evaluation (CAPE), to be reasonable; and
the management structure of the program is adequate to
manage and control program costs.
Based on the findings of various programs' CCP, the senior official
or the Milestone Decision Authority, in consultation with DBSMC
members, has directly implemented corrective actions to address the
root causes of the breaches. For example, programs have been directed
to:
restructure into smaller increments focused on
discrete capability delivery aligned to the user needs;
put in place additional performance measures to track
high risk areas identified by the critical change team, such as
interfaces, data conversion, defect reports, et cetera;
restructure the program's contracts to limit the
Government's cost exposure;
limit obligation authority tied to short-term program
milestones vice multi-year funding authority; and
limit fielding of releases of an increment to do
additional testing or demonstrate operational stability of a
release prior to full deployment.
44. Senator Ayotte. Ms. McGrath, most of the CCP submissions to
Congress basically come to the conclusion that the status quo is
appropriate and that, despite the fact of being over budget and beyond
schedule, we should just keep going and going under the original plans.
What specific programmatic changes can you point to that the DBSMC has
imposed on any of these programs in response to this poor track record?
Ms. McGrath. The senior official, typically the component
acquisition executive, within the acquisition chain of command is
responsible for certifying programs in accordance with CCP described in
10 U.S.C., Chapter 144a, not the DBSMC. As part of the CCP the senior
DOD official responsible for the program provides written certification
(with supporting explanation) that:
the automated information system to be acquired is
essential to the national security or to the efficient
management of DOD;
there is no alternative to the system which will
provide equal or greater capability at less cost;
the new estimates of the cost, schedule, and
performance with respect to the program and system or
information technology investment, as applicable have been
determined with the concurrence of the Director of CAPE, to be
reasonable; and
the management structure of the program is adequate to
manage and control program costs.
Based on the findings of various programs' CCP, the senior official
or the Milestone Decision Authority, in consultation with DBSMC
members, has directly implemented corrective actions to address the
root causes of the breaches. For example, programs have been directed
to:
restructure into smaller increments focused on
discrete capability delivery aligned to the user needs;
put in place additional performance measures to track
high risk areas identified by the critical change team, such as
interfaces, data conversion, defect reports, et cetera;
restructure the program's contracts to limit the
Government's cost exposure;
limit obligation authority tied to short-term program
milestones vice multi-year funding authority; and
limit fielding of releases of an increment to do
additional testing or demonstrate operational stability of a
release prior to full deployment.
45. Senator Ayotte. Ms. McGrath, how often has audit readiness been
discussed at DBSMC meetings?
Ms. McGrath. DOD's FIAR efforts have been specifically briefed at
the DBSMC six times and have also been discussed as part of the DBSMC's
quarterly performance reviews.
46. Senator Ayotte. Ms. McGrath, what specific actions have
resulted from those discussions where people were directed to do
something differently?
Ms. McGrath. Examples of direction from the DBSMC as a result of
briefings on DOD's FIAR efforts include revisions of financial
management goals in DOD's SMP, further development of the Standard
Financial Information Structure (SFIS) standards and additional
dialogue between the Under Secretary of Defense (Comptroller), and the
CMO of the Air Force to ensure that Air Force audit efforts were
properly resourced and aligned with DOD's direction.
47. Senator Ayotte. Ms. McGrath, the DBSMC has the responsibility
to oversee DOD's compliance with the BEA, but GAO has raised concerns
about the thoroughness of the reviews that are performed by the IRBs to
ensure that compliance is actually occurring. I'm specifically
interested in what you call the SFIS, which has been in the
architecture for several years and is essential for achieving audit
readiness. I believe the DOD IG had written a report a couple of years
ago that was very critical of one of the Army ERP programs for not
really being compliant with this requirement, even though they had
successfully gone through the review process. What steps does the
review process under the direction of the DBSMC take to absolutely
ensure that these new systems are compliant with this standard
financial structure?
Ms. McGrath. Since the DOD IG report concerning the Army ERP
programs, my office has begun an independent assessment of every ERP
and business system that needs to be compliant with SFIS and USSGL.
These reviews look at the underlying system's SFIS configuration, its
USSGL posting logic, its ability to interface using SFIS, and its
financial reporting capability. For each element in SFIS, there are
implementable business rules that address syntax, usage, and
relationships. To be compliant with SFIS, a system must be compliant
with the SFIS business rules. Each business rule is evaluated against
the system's configuration. For an ERP, approximately 250 business
rules will be evaluated. To date, we have performed 12 validations and
expect to complete the remaining 38 validations by December 2012.
Additionally, since the DOD IG report concerning the Army ERP programs,
the DOD IG has begun to review all ERPs for the SFIS requirements and
my staff meets regularly with DOD IG to provide recommendations and
exchange information concerning SFIS validation. Prior to this, the
SFIS assessment process was a self-assertion process.
48. Senator Ayotte. Ms. McGrath, where those reviews have actually
been conducted, what did they find?
Ms. McGrath. As discussed in the answer to question #47, to date,
DOD has conducted 12 independent assessments of SFIS compliance and
expects to complete the remaining 38 assessments by December 2012. For
the systems assessed to date, preliminary results indicate that overall
average SFIS compliance is approximately 78 percent. General reasons
for non-compliance include:
Out-of-date reporting chart of accounts
Out-of-date posting chart of accounts
Improper posting logic
System interfaces not yet updated for SFIS compliance
Poorly maintained data sets
Improper derivation logic
External configuration guidance that conflicts with
and/or is not documented in the BEA
Financial business processes highly dependent on non-
SFIS or legacy data
We continue to work closely with DOD IG, the Program Offices, and
Office of the Under Secretary of Defense (Comptroller) to correct
deficiencies that have been identified.
49. Senator Ayotte. Ms. McGrath, what examples can you offer where
you have actually validated this compliance, as opposed to, say, just
taking someone's word for it through unchecked self-assertions?
Ms. McGrath. As discussed in the answers to questions #47 and #48,
my office has begun an independent assessment of every ERP and business
system that is required to be compliant with SFIS and USSGL. These
reviews look at the underlying system's SFIS configuration, its USSGL
posting logic, its ability to interface using SFIS, and its financial
reporting capability. To date, we have performed 12 validations and
expect to complete the remaining 38 validations by December 2012.
Additionally, since the DOD IG report concerning the Army ERP programs,
the DOD IG has begun to review all ERPs for the SFIS requirements and
my staff meets regularly with DOD IG to provide recommendations and
exchange information concerning SFIS validation.
DEFENSE AGENCIES INITIATIVE CASE STUDY
50. Senator Ayotte. Ms. McGrath, one of the Business Transformation
Agency's (BTA) largest initiatives is the DAI, an ERP system for
defense agencies. BTA, in fact, was the first agency to implement DAI
for itself, and from what we understand, was a small-scale effort but
one that was very successful in terms of following the best practices
you advocate. Now, we hear that as BTA is being shut down, and about
half the agency or so is being folded into your office, that you're
going to stop using DAI for your new business in fiscal year 2012 and
force the BTA folks that you're inheriting to go back to the old,
antiquated system supplied out of DOD. Why would you want to go
backwards when you have this new system already up and running?
Ms. McGrath. I do not intend to move backwards with DAI deployment
plans. The current implementation schedule for DAI, for fiscal years
2012 through 2016, continues to include 25 Defense Agencies.
The Office of the Deputy CMO is part of OSD, which is currently
supported by Washington Headquarters Service (WHS). WHS is scheduled to
implement DAI in fiscal year 2016. It did not make sense for DOD to
significantly alter the implementation schedule for DAI because of a
small number of BTA employees moving into OSD.
51. Senator Ayotte. Ms. McGrath, isn't DOD operation targeted to
migrate to DAI in the future?
Ms. McGrath. Yes, the activity that supports day-to-day operations
for OSD, WHS is scheduled to begin implementation of DAI in fiscal year
2015 and become operational in early fiscal year 2016.
52. Senator Ayotte. Ms. McGrath, why does it not just accelerate
DAI's deployment, instead of forcing you to regress to their old system
that appears to be exactly the kind of system you are trying to move
away from?
Ms. McGrath. Acceleration of the schedule would be extremely
challenging and provide increased risk to the established workload. The
DAI implementation schedule includes the deployment of multiple sites
over the next few years and program resources have been allocated to
meet this schedule. Additionally, the specific sites are currently
preparing for implementation, which includes data cleansing efforts,
training, and BPR. Further, in addition to the increased risk,
additional resources would be required to accelerate.
53. Senator Ayotte. Ms. McGrath, how is jettisoning DAI today
consistent with the practices and direction you've otherwise advocated
for DOD in terms of improving its business systems and processes?
Ms. McGrath. The program has not been jettisoned. The current
implementation schedule for DAI, for fiscal years 2012 through 2016,
continues to include 25 Defense Agencies.
54. Senator Ayotte. Ms. McGrath, in your best, independent,
professional judgment, should this system continue to be used?
Ms. McGrath. Yes, the program should continue. DAI is pivotal for
DOD Agencies in terms of meeting the requirements of Federal statutes
requiring auditable financials and producing clean audits, and in
complying with DOD architectural standards driven by the Deputy Chief
Management Officer (DCMO).
55. Senator Ayotte. Ms. McGrath, what, if anything, does this
episode relating to DOD's decision to move away from DAI imply about
your office's ability to fulfill its charter?
Ms. McGrath. DOD is not moving away from DAI. My office will
continue to play a significant role in DOD's DAI implementation and
will move to DAI itself with the rest of OSD in early fiscal year 2016.
I do not believe that this reflects on my office's ability to fulfill
its charter.
56. Senator Ayotte. Ms. McGrath, regardless of what happened with
DAI or why it was done, to what extent does not having funds control of
the multiple different service business system programs hamper your
ability to get the Services to follow your business transformation
guidance or directives?
Ms. McGrath. I am currently able to influence funds control of
DOD's diverse portfolio of business systems as Vice Chair of the DBSMC,
as a member of the IRBs, and as Milestone Decision Authority for many
of our business Major Automated Information System (MAIS) programs.
However, the proposed changes to 10 U.S.C. Section 2222, expanding and
centralizing the oversight function of the IRBs, under consideration by
the Congressional Defense Committees in the National Defense
Authorization Act (NDAA) for Fiscal Year 2012 would be a welcome
expansion of the existing statute, as it would enable greater
transparency of business investments.
DISESTABLISHMENT OF THE BUSINESS TRANSFORMATION AGENCY
57. Senator Ayotte. Ms. McGrath, Secretary Gates directed that the
BTA be disestablished in his announcement last August. What impact, if
any, will that decision have on your ability to continue to drive
business transformation across DOD?
Ms. McGrath. I do not see a long-term impact on my ability to drive
business transformation across DOD. When BTA was established in 2006,
it was entrusted with the mission of reforming and modernizing DOD's
business practices. That mission remains valid. However, with the
establishment of the position of DCMO as an Under Secretary of Defense-
level official in OSD, fairly substantial overlap was created. It was
determined that the benefit provided by the BTA could be more
effectively realized through the disestablishment of the BTA and the
incorporation of its core functions into the office of the DCMO and the
incorporation of its direct program management responsibilities for
specific enterprise Defense Business Systems (DBS) into the DLA. This
consolidation will enable more agile management of DOD's business
transformation functions and enhance our ability to carry out our
mission.
58. Senator Ayotte. Ms. McGrath, it seems that transformation kinds
of programs require highly skilled people to lead those efforts. I,
however, understand that more than a third of the BTA staff has left
DOD since the Secretary's announcement last year, including most of the
top leadership. Why should I not conclude that this will negatively
impact on your ability to be successful?
Ms. McGrath. My office continues to be equipped with the people and
hiring authorities necessary to effectively execute its mission. First,
while we lost several key personnel during the disestablishment of the
BTA and the incorporation of its core functions into the office of the
DCMO and the incorporation of its direct program management
responsibilities for specific enterprise DBS into the DLA, we also
retained many key personnel, including those with expertise in ERP
system implementations, architecture development, and process
improvement, among other critical skills. We are moving quickly to hire
new staff to replace those that left. Additionally, I plan on
continuing to utilize the Highly Qualified Expert (HQE) hiring
authority, which BTA used quite effectively, to hire individuals
outside of the Federal Government who are leading authorities in
technical disciplines and other areas of expertise needed by the
Government to satisfy emerging and non-permanent requirements. I
embrace the HQE model and intend to supplement my seasoned government
staff with these HQEs.
EXPEDITIONARY COMBAT SUPPORT SYSTEMS
59. Senator Ayotte. Ms. McGrath and Secretary Morin, one of the
most expensive ERP systems in DOD is the Air Force's ECSS. While this
ERP, which is actually a commercial-off-the-shelf system, is primarily
seen as a logistics system, our understanding is that it is also very
much a financial system, in particular for the Air Force's Working
Capital Fund (WCF).
Since having begun in 2004, to date this program has spent
approximately $800 million and has yet to really deliver any meaningful
capabilities. And it won't be fully deployed until 2016--just a year
before the 2017 deadline by which DOD must be audit-ready. To me, this
sounds like a train wreck waiting to happen. On what factual basis do
you have confidence that this program will get fully implemented or
provide required capability as intended?
Ms. McGrath. I share your concerns regarding ECSS. In February
2011, the Milestone Decision Authority, the Under Secretary of Defense
for Acquisition, Technology, and Logistics directed the program to
create time and condition-based success criteria that if not met, would
be used to evaluate future options for ECSS. The Milestone Decision
Authority allowed the program to proceed with increment one, Pilot C
(material management) because that effort was already on contract with
the system integrator as a fixed-price effort.
By September 2011, it was evident that the program was not able to
meet the stated success criteria. Therefore the Milestone Decision
Authority directed the program to conclude pilot C and stop work on
pilot D (mobile supply chain management) which limits the Government's
customer liability. In addition, the Milestone Decision Authority
created an assessment team to identify possible way-ahead options for
the program. The assessment team concluded their analysis and made a
recommendation to the Milestone Decision Authority in late 2011. The
Milestone Decision Authority is in the process of evaluating the
information.
Secretary Morin. The Air Force has already fielded some limited
system capability through ECSS Pilot A (Vehicle and Tools Management)
and Pilot B (Equipment Management) at Hanscom AFB. In addition, the Air
Force reviews ECSS' key metrics on a weekly basis to assess the
progress of software code development, data cleansing, interface test
readiness, test case execution, and deficiency reports. This review
provides leadership with actionable information on the health of Pilot
C (Materiel Management) and Pilot D (Mobile Supply Chain) activities.
The ECSS program is both a critical and complex enterprise. Although
its performance has been inconsistent, ECSS is only one tool the Air
Force plans to use to create auditable financial statements. The
combination of enhancements to legacy systems and fielding of ERP
systems helps reduce the risks of achieving the 2017 deadline.
60. Senator Ayotte. Ms. McGrath, what specific oversight, if any,
has you office exercised over this program?
Ms. McGrath. My office has direct involvement with the oversight of
this program. In February 2011, in concert with the Under Secretary of
Defense, Acquisition, Technology and Logistics, we created an
Overarching Integrated Product Team (OIPT) lead for MAIS DBS. The DBS
OIPT is chaired by one of my senior division directors who reports
directly to me and the Milestone Decision Authority. The DBS OIPT lead
is well-versed in DOD's business processes as well as the defense
acquisition process.
61. Senator Ayotte. Ms. McGrath, on the basis of that oversight,
what are your concerns about this ERP?
Ms. McGrath. My concerns with ECSS center around the ability of the
program office to meet the criteria established in February 2011
(reference my response to question #59). As such, I worked with the
Milestone Decision Authority to place the following conditions on the
program as part of the critical change certification per 10 U.S.C.
Chapter 144a:
Document and lock requirement for ECSS Increment I,
Pilot C and D. Pilot C was designed to provide operational and
tactical logistics capability at the base level. Pilot D was
designed to provide capability that would enable Air Force
personnel to operate in a disconnected environment; i.e., away
from a base. The intent of this action was to prevent
``requirements churn''.
Define the success criteria the Air Force will use to
assess the health of the program as well as alternative
strategies to provide the necessary ECSS capabilities if the
program is unable to meet the defined success criteria. The
intent of this condition was to define and enforce a
performance based ``trigger'' that the Air Force could be used
to evaluate success of the program.
Adopt program status metrics defined by the Milestone
Decision Authority to measure the health of the program. The
intent of this condition was to establish a set of transparent
measures that all program stakeholders could use to monitor the
health of the program.
62. Senator Ayotte. Ms. McGrath, has your office explored, or does
it intend to explore, any alternatives to ECSS?
Ms. McGrath. Yes, my office is actively exploring options for ECSS.
In fact, functional and ERP experts from my staff are directly involved
in the assessment team referenced in response to question #59. Further,
the DBS OIPT referenced in response to question #60 has a direct role
in the assessment process.
63. Senator Ayotte. Ms. McGrath, at some point, don't you need to
just shut down out-of-control programs like this? Should that happen
here?
Ms. McGrath. Yes, we should shut down out-of-control programs. In
this case, however, I believe it was not appropriate to shutdown ECSS
because Increment One, Pilot C (base level logistics support) was
already on contract with the system integrator as a fixed price effort.
Increment One, Pilot D on the other hand (disconnected logistics
support) was not under contract on a fixed-priced basis. In September,
when it was evident that the program was not able to meet established
success criteria (see question #61), the Milestone Decision Authority
directed the program to stop work on Increment One, Pilot D,
effectively limiting the Government's liability and shutting down
future development work. In addition, the Milestone Decision Authority
created an assessment team to identify possible way-ahead options for
the program. The assessment team made a recommendation in late 2011
that we are in the process of evaluating.
64. Senator Ayotte. Secretary Morin, has the Air Force explored, or
does it intend to explore, an alternative to ECSS?
Secretary Morin. Yes, the Air Force has and will continue to
investigate alternatives to the ECSS program. In February 2011, the Air
Force submitted the ECSS Critical Change report through OSD/AT&L to
Congress. The report included analysis of several delivery alternatives
and different ECSS program structures. In addition, the Air Force
actively monitors the health of ECSS using pilot programs, capturing
metrics, and collectively assessing ECSS alternatives. The metrics
reviews and alternative development efforts are ongoing.
enterprise architecture and investment controls \1\
---------------------------------------------------------------------------
\1\ GAO, DOD Financial Management: Numerous Challenges Must Be
Addressed to Improve Reliability of Financial Information, GAO-11-835T
(Washington, DC: July 27, 2011).
---------------------------------------------------------------------------
65. Senator Ayotte. Ms. McGrath and Mr. Khan, as Congress, the OMB,
and the Federal Chief Information Officers Council (CIOC) have
recognized, effectively using a well-defined enterprise architecture is
vital to organizational transformation and systems modernization. A
corporate approach to investment controls management is a similarly
important characteristic of successful public and private
organizations. DOD continues to release updates to its corporate
enterprise architecture. But, how successfully has this architecture
been federated through the development of aligned subordinate
architectures for each of the Military Departments?
Ms. McGrath. BEA is the thin enterprise architecture layer that
articulates the corporate vision, strategic direction, and principles
for the target capabilities and processes in support of the DOD
Strategic Management Plan goals. It is aligned to and decomposed by the
Military Departments into segment architectures. Individual program and
system investments and their architectures are first aligned with and
assessed against the Military Departments' architectural segments and
then assessed against the enterprise direction contained in the BEA for
capital planning and investment control. While important progress has
been made, as recognized by the GAO, architecture federation between
BEA and the Military Department architectures remains a challenge.
Mr. Khan. As we reported in June 2011,\2\ adopting a federated \3\
approach continues to be a challenge with much remaining to be
accomplished at the component level. While DOD continues to release
updates to its corporate enterprise architecture, the architecture has
yet to be federated through development of aligned subordinate
architectures for each of the Military Departments. Each of the
Military Departments has made progress in managing its respective
architecture program, but there are still limitations in the scope and
completeness, and the maturity of the Military Departments'
architecture programs. For example, while each department has
established or is in the process of establishing an executive committee
with responsibility and accountability for the enterprise architecture,
none has fully developed an enterprise architecture methodology or a
well-defined BEA and transition plan to guide and constrain business
transformation initiatives.
---------------------------------------------------------------------------
\2\ GAO, DOD: Further Actions Needed to Institutionalize Key
Business System Modernization Management Controls, GAO-11-684
(Washington, DC: June 29, 2011).
\3\ A federated architecture consists of a family of coherent but
distinct member architectures, in which subsidiary architectures
conform to an overarching corporate architectural view and rule set.
---------------------------------------------------------------------------
In addition, while DOD continues to establish investment management
processes, the DOD enterprise and the Military Departments' approaches
to business systems investment management still lack the defined
policies and procedures needed for effective investment selection,
control, and evaluation. Until DOD fully implements these institutional
modernization management controls required by law and addressed in GAO
recommendations, its business systems modernization will likely remain
a high-risk program.
66. Senator Ayotte. Ms. McGrath and Mr. Khan, how does DOD intend
to improve in this area?
Ms. McGrath. DOD is focused on improving architecture federation in
two main areas. First, we have shifted the BEA from being organized
functionally to being organized based on end-to-end (E2E) business
processes. Second, we are mandating the use of international standards
for building architectures. Our use of standards such as the Web
Ontotology Language (OWL) and Business Process Modeling Notation (BPMN)
provides the same opportunity for universal understanding that
HyperText Markup Language (HTML) provides for users browsing pages on
the internet. Both areas will facilitate the alignment and integration
of DOD's efforts.
DOD has identified 15 E2E business processes that
represent a set of mature industry and Government leading
practices for horizontal integration across the organization.
DOD's Strategic Management Plan (fiscal years 2012-2013) in its
goal #6 focuses DOD's efforts to reengineer/use E2E business
processes to reduce transaction times, drive down costs, and
improve service. For fiscal year 2012, DOD is focusing first on
mapping the Procure-to-Pay and Hire-to-Retire processes while
continuing to enhance other E2E processes.
The E2Es are represented as Business Process Models
(BPMs) and are both horizontally integrated and vertically
integrated where they connect. The DCMO issued an executive
memorandum requiring that the BEA adopt international standards
for visualizing the BPMs and for the identifying and
documenting the data required to support the models. BEA
version 10.0 will be based opon these standards. As the
Military Departments adopt these standards, it will support
better alignment and federation to the BEA.
Mr. Khan. As we reported in June 2011,\4\ a well-defined federated
architecture and accompanying transition plans for the business mission
area, along with well-defined investment management policies and
procedures across all levels of DOD, are critical to effectively
addressing DOD's business systems modernization high-risk area. DOD has
continued to take steps in defining and implementing key institutional
modernization management controls, but challenges that we identified in
prior years \5\ still need to be addressed. Our previous
recommendations to DOD have been aimed at accomplishing these and other
important activities related to its business systems modernization. To
DOD's credit, it has agreed with these recommendations and said it is
committed to implementing them.
---------------------------------------------------------------------------
\4\ GAO-11-684.
\5\ See for example, GAO, DOD Business Systems Modernization:
Recent Slowdown in Institutionalizing Key Management Controls Needs to
Be Addressed, GAO-09-586 (Washington, DC: May 18, 2009); DOD Business
Systems Modernization: Military Departments Need to Strengthen
Management of Enterprise Architecture Programs, GAO-08-519 (Washington
DC: May 12, 2008); DOD Business Systems Modernization: Progress in
Establishing Corporate Management Controls Needs to Be Replicated
Within Military Departments, GAO-08-705 (Washington, DC: May 15, 2008);
Business Systems Modernization: Department of the Navy Needs to
Establish Management Structure and Fully Define Policies and Procedures
for Institutionally Managing Investments, GAO-08-53 (Washington, DC:
Oct. 31, 2007); Business Systems Modernization: Air Force Needs to
Fully Define Policies and Procedures for Institutionally Managing
Investments, GAO-08-52 (Washington, DC: Oct. 31, 2007); DOD Business
Systems Modernization: Progress Continues to Be Made in Establishing
Corporate Management Controls, but Further Steps Are Needed, GAO-07-733
(Washington, DC: May 14, 2007); Business Systems Modernization: DOD
Continues to Improve Institutional Approach, but Further Steps Needed,
GAO-06-658 (Washington, DC: May 15, 2006); and DOD Business Systems
Modernization: Important Progress Made in Establishing Foundational
Architecture Products and Investment Management Practices, but Much
Work Remains, GAO-06-219 (Washington, DC: Nov. 23, 2005).
NAVY SYSTEMS AUDIT READINESS
67. Senator Ayotte. Ms. McGrath and Secretary Commons, the Marine
Corps has been trying to become fully auditable for quite some time,
putting a lot of effort into this. Yet, it seems like every year the
FIAR plan indicates slippage, and that the Navy won't ever get to the
goal. What, in your view, are the primary obstacles to progress?
Ms. McGrath. The current legacy environment has several material
internal control deficiencies such as lack of proper supporting
documentation, non-standard systems, non-standard data, and non-
standard processes. DOD needs to move to a business environment that
enforces internal controls and begins to replace non-standard business
operations and systems. A disparate system environment is one of the
key challenges in achieving auditability. As stated in the DOD 2010
Agency Wide Financial Report, material weaknesses fall into two major
categories: (1) Noncompliant Systems. Most legacy systems do not comply
with the wide range of systems requirements, and do not provide
assurance that core financial systems and related information is
traceable to source transactional information. Smaller organizations
have successfully applied compensating controls, as demonstrated by
favorable audit opinions, but these are not as practical in larger
organizations, such as the military departments. (2) Legacy Financial
Processes. Many financial processes, such as accounts receivable and
accounts payable, do not comply with Generally Accepted Accounting
Principles (GAAP) because they are dependent on the noncompliant legacy
systems currently used to compile financial information for DOD
financial statements. Leveraging ERP investments to their fullest
potential will increase referential integrity, reduce the number of
interfaces, and significantly reduce these material weaknesses.
Secretary Commons. The major challenges the Navy faces pursuing
auditability are in two general areas. First, the Navy's business-
financial environment has evolved over time without synchronization to
financial audit standards. Business processes have been tailored by
users for their own optimization; financial accounting implications of
these designs were of a lesser concern. End-to-end business processes
span multiple functional areas, with stakeholders both in and outside
of the Navy; coordinating these multiple stakeholders to embrace
changes needed for audit readiness is a large task. Moreover, legacy
accounting systems have been designed primarily to perform funds/
budgetary accounting, not proprietary/financial accounting.
Our second challenge is data management. Source documentation to
support a financial audit may not be available in all instances, as
systems and processes have not been designed to support audit
readiness. Building an audit response infrastructure, which can
assemble and transfer massive amounts of transactional data in a short
timeframe, is a complex challenge.
68. Senator Ayotte. Ms. McGrath and Secretary Commons, the Navy has
its core accounting system, and then all these feeder systems, some of
which are Marine Corps systems, DFAS systems, DOD systems, et cetera.
From what you've learned, how does all this integration to these other
systems impact the Navy's ability to become ready for an audit?
Ms. McGrath. Integration between core accounting systems and legacy
feeder systems is a challenge as the key to becoming auditable rests
with developing compliant, integrated systems aligned to our stated
audit objectives. If we cannot completely integrate our financial and
financial feeder systems we will implement and document manual work-
arounds in order to become ready for an audit.
Secretary Commons. As the number of systems and systems owners
increase, the complexity of the challenge increases commensurately.
However, audit readiness in this complicated business-financial
environment is feasible. Auditability is dependent on strengthening the
control environment of our end-to-end business processes. In that vein,
standardization of our business process and associated systems are key
elements of these end-to-end processes.
As a milestone in audit readiness, comprehensive surveys must be
conducted on relevant business systems to ensure that their general
(access and security) controls and their application (business
execution, including interfaces) controls are designed and operating
effectively. The Navy will continue to conduct surveys on its major
business-financial systems and correct any deficiencies indicated by
these assessments; an assessment of Navy ERP's control environment
using financial audit standards is currently underway.
The Navy is also highly dependent on multiple outside service
providers (primarily other Defense agencies) which manage and maintain
business systems producing data flowing to the Navy financial
statements. These service providers must bolster the control
environments of their contributing business systems by assessing their
general and application controls and strengthening them where
necessary. The Navy is partnering with OSD, other components, and with
external service providers to ensure that joint collaboration leads to
success.
69. Senator Ayotte. Ms. McGrath and Secretary Commons, what, if
anything, is your office doing to either make these other systems
compliant to support an audit or to replace them?
Ms. McGrath. I have made a concerted effort as part of the systems
acquisition process to ensure that business systems progress toward DOD
audit goals while also delivering capability to the users. To that end,
I fully support the DOD Comptroller's effort, which was integrated with
a recent acquisition decision, to rely upon the opinion of an IPA firm,
to be expressed in an examination of the Navy audit readiness assertion
of a Navy ERP entity, currently planned for September 30, 2012. This
approach will allow for identification of system and process
enhancements scheduled for completion within 12 months.
Secretary Commons. The control environment of all relevant business
systems must be assessed for adequacy, and changes must be made to
strengthen the controls when necessary to support audit readiness.
Enforced standardization of our business processes is the underlying
foundation. The Navy will conduct these surveys on the major business-
financial systems managed and maintained by the Navy. We are partnering
with OSD, other components, and with external service providers to
ensure success in this area.
70. Senator Ayotte. Ms. McGrath, please provide a list of those
systems, especially the ones that are required to be used by OSD across
DOD, that represent the most significant stumbling blocks to audit
readiness and explain exactly what the plan is to overcome this problem
for each of these systems.
Ms. McGrath. Some of the most critical enterprise systems to
achieving audit readiness are the Defense Departmental Reporting System
and the Defense Cash Accountability System, which are part of the
Business Enterprise Information Services (BEIS) family of systems, as
well as the Automated Disbursing System (ADS) and the Deployable
Disbursing System (DDS), which are part of the Standard Disbursing
Initiative (SDI). The BEIS family of systems provides timely, accurate,
and reliable business information from across DOD to support auditable
financial statements and provides specific functionality such as a DOD-
wide system for Treasury reporting. SDI addresses current disbursing
challenges by consolidating existing functionality to meet DFAS
customer needs for enterprise ADS and tactical DDS disbursing. These
enterprise systems are primarily developed and maintained by DOD core
service providers such as the DFAS and DLA and must efficiently work
with each of the Military Department's financial systems and processes.
To ensure that this happens, the DCMO and Under Secretary of Defense
(Comptroller), through the FIAR governance structure, are facilitating
collaboration between the service providers and Military Departments to
make sure that the necessary changes are made on both sides to create
an effective target environment.
Additionally, each Military Department has a number of legacy
systems in place that must be replaced through the implementation of
modern ERP systems to achieve audit readiness. These ERPs come with
greater capabilities and higher level controls than the systems they're
replacing. These plans are included in the DOD's FIAR plan.
71. Senator Ayotte. Secretary Commons, I understand that when the
Navy's primary ERP system is fully deployed it will only cover just
over half of all obligation authority in the Navy. The rest will be
covered by legacy financial systems. How will the Navy maintain a clean
audit opinion if it achieves one?
Secretary Commons. The control environments of Navy ERP and other
business-financial systems must be assessed and strengthened to ensure
that they meet the standards for financial auditability. Enforced
standardization of our business processes is the underlying foundation.
The Navy will make necessary changes to its legacy and Navy ERP
financial systems to strengthen its key internal and systems controls
as required. We will also partner with outside service providers to
ensure they do the same to their systems which support us. To ensure
sustained effectiveness, key controls will be continually monitored and
periodically tested as an essential component of the system owner's
internal controls program.
72. Senator Ayotte. Secretary Commons, is it the Navy's plan to
employ a time-consuming, expensive manual effort each year to maintain
a clean audit opinion with the legacy financial systems?
Secretary Commons. It is not our intent to employ a time consuming,
expensive manual effort each year to maintain a clean audit opinion
with our legacy financial systems. The Navy plans to implement Navy ERP
through the present schedule, which encompasses six large acquisition
commands. The Navy will continue to assess the costs and benefits of
expanding the number of organizations using Navy ERP; part of the cost-
benefit equation will be the costs and returns of audit readiness.
The Navy will make necessary changes to its legacy and Navy ERP
financial systems to strengthen its key internal and systems controls
as required, with the objective of automating as many manual processes
as possible. We will also partner with outside service providers to
ensure they do the same to their systems which support us. To ensure
sustained effectiveness, key controls will be continually monitored and
periodically tested as an essential component of the system owner's
internal controls program.
LEADERSHIP AND ACCOUNTABILITY
73. Senator Ayotte. Mr. Khan, my sense is that there is no day-to-
day commitment among leadership at DOD to achieve auditability. And,
DOD's oversight of the components' efforts to become auditable seems to
rely mostly on self-reporting. Do you agree?
Mr. Khan. The DOD Comptroller has expressed commitment to the FIAR
goals, and has established a focused approach that is intended to help
DOD achieve successes in the near-term. But the financial
transformation needed at DOD, and its removal from GAO's high-risk
list, is a long-term effort. Improving financial management will need
to be a cross-functional endeavor; which requires improvement in some
of DOD's other business operations such as those in the high-risk areas
of contract management, supply chain management, support infrastructure
management, and weapon systems acquisition. As acknowledged by DOD
officials, sustained and active involvement of DOD's CMO, the DCMO, the
DOD Comptroller, the Military Departments' CMOs, and other senior
leaders is critical for the successful implementation of the FIAR plan.
Absent continued momentum, the current initiative may falter, as have
previous efforts.
Ensuring effective monitoring and oversight of progress--especially
by the leadership in the components--will be key to bringing about
effective implementation through the components' Financial Improvement
Plans (FIP). Effective oversight also holds individuals accountable for
carrying out their responsibilities. In this regard, DOD has introduced
incentives such as including FIAR goals in Senior Executive Service
Performance Plans.
74. Senator Ayotte. Mr. Khan, how, in your view, can top leadership
at DOD better drive throughout DOD an effort as large as achieving the
first unqualified audit opinion of DOD's consolidated financial
statements?
Mr. Khan. DOD's past strategies for improving its financial
management were ineffective, but recent initiatives are encouraging. In
2005, DOD issued its FIAR plan for improving financial management and
reporting. In 2009, the DOD Comptroller directed that FIAR efforts
focus on financial information in two priority areas: budgetary
information and asset accountability. The FIAR plan also has a new
phased approach that comprises five waves of concerted improvement
activities. The first three waves focus on the two priority areas and
the last two waves on working toward full financial statement
auditability. The FIAR plan is being implemented largely through the
DOD components, including the Army, the Navy, and the Air Force
Military Departments and the DLA, through the development and
implementation of their respective FIPs--lending increased importance
to the commitment of component leadership. The component's FIPs are
intended to both guide and document financial improvement efforts.
As discussed in our testimony,\6\ improving DOD's financial
management operations and thereby providing DOD management and Congress
more accurate and reliable information on the results of its business
operations will not be an easy task. Numerous challenges must be
addressed in order for DOD to successfully reform financial management.
Some of the key challenges that DOD must address in order for the
financial management operations of DOD to improve to the point where
DOD may be able to produce auditable financial statements are:
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\6\ GAO-11-835T.
Committed and sustained leadership. Improving
financial management will need to be a cross-functional
endeavor. The successful resolution of the weaknesses in
financial management depends on improvements in some of DOD's
other business operations such as contract management, supply
chain management, and weapon systems acquisition. As
acknowledged by DOD officials, sustained and active involvement
of DOD's CMO, the DCMO, the Military Departments' CMOs, the DOD
Comptroller, and other senior leaders is critical.
Effective plan to correct internal control weaknesses.
Because of DOD's complexity and magnitude, developing and
implementing a comprehensive plan that identifies DOD's
internal control weaknesses will not be an easy task. But it is
a task that is critical to resolving the longstanding
weaknesses and will require consistent management oversight and
monitoring, at all levels including each and every component of
DOD, for it to be successful. Such a baseline could be used to
assess and plan for the necessary improvements and remediation
to be used to measure incremental progress toward achieving
estimated milestones for each DOD component and DOD.
Accountability and effective oversight. Ensuring
effective monitoring and oversight of progress--especially by
the leadership in the components--will be key to bringing about
effective implementation of the FIAR plan through the
components' FIPs. If DOD's future FIAR plan updates provide a
comprehensive strategy for completing Waves 4 and 5, the FIAR
plan can serve as an effective tool to help guide and direct
DOD's financial management reform efforts.
75. Senator Ayotte. Mr. Khan, what value do you see in either
separating the CMO position from the position of Deputy Secretary of
Defense or putting the responsibility for achieving an unqualified
audit opinion of DOD's consolidated fiscal year 2017 financial
statements under the joint leadership of the CMO and the CFO?
Mr. Khan. Because of the complexity and long-term nature of DOD's
business transformation efforts, GAO has recommended the need for a
separate CMO position with significant authority, experience, and a
sufficient term to provide focused and sustained leadership. In May
2007, the Secretary of Defense designated the Deputy Secretary of
Defense as DOD's CMO. The NDAA for Fiscal Year 2008 codified the CMO
position, created a DCMO position, directed that CMO duties be assigned
to the Under Secretary of each Military Department, and required DOD to
develop a SMP for business operations.
DOD has taken various steps to implement the CMO and DCMO
positions, and to develop a strategic plan. For example, in 2008, DOD
issued its first SMP. DOD has also issued directives that outlined
broad CMO and DCMO responsibilities, established a DCMO office, and
named an Assistant DCMO. In July 2009, and again in December 2010, DOD
updated its SMP. As of March 2010, all of the Military Departments had
CMOs in place, and in July 2010, the DCMO was confirmed in her
position. In addition, DOD has established various governance entities,
such as the DBSMC, which is intended to serve as the primary forum for
addressing overall business transformation, and the End-to-End Process
Governance Board, whose role is to advise the DBSMC on opportunities to
enhance the management and execution of end-to-end business processes
across DOD. While GAO recognizes that DOD has taken some positive
steps, our work indicates that additional opportunities exist for the
CMO, assisted by the DCMO, to provide the leadership needed to ensure
that actions to implement reforms are completed and to achieve the
goals reflected in the SMP, including those in areas we have identified
as high-risk, such as financial management. Moreover, opportunities
also exist for the CMO and DCMO to take on a greater leadership role in
implementing ongoing DOD-wide efforts to achieve more efficiencies in
its operations and to ensure results in individual business areas.
Finally, DOD needs to take additional actions to further develop a
business transformation plan that contains measurable goals and funding
priorities and that is supported by a strategic planning process that
includes mechanisms to fully align plans and budgets and to measure
progress against goals. It remains to be seen whether the current
arrangement, rather than establishing the CMO as a separate position,
will enable DOD to provide the long-term sustained leadership needed to
address significant challenges in its business operations.
The CMO has various responsibilities, including to develop and
maintain a DOD-wide strategic plan for business reform; establish
performance goals and measures for improving and evaluating overall
economy, efficiency, and effectiveness; and monitor and measure the
progress of DOD. The DOD Comptroller/CFO is focused on the financial
management aspects of DOD, which includes preparing auditable financial
statements. Based upon our discussions with the office of DOD's
Comptroller/CFO and statements made by DOD's DCMO and DOD Comptroller/
CFO, at the hearing, they are working in a collaborative manner to
address DOD's business transformation issues and auditability. Both
individuals are part of the FIAR Governance Board which is responsible
for reviewing the DOD components' progress in achieving auditability.
Further, both offices participate in the review of the various DOD
components' efforts to modernize their business systems, which DOD has
acknowledged as critical for achieving audit readiness by fiscal year
2017. Issuing auditable financial statements is a key responsibility of
the DOD Comptroller, but the CMO and DCMO will be instrumental in
supporting the Comptroller's efforts to improve the reliability of
financial information generated by business functions for which other
DOD leaders are responsible.
76. Senator Ayotte. Mr. Khan, from a management or leadership
perspective, what, if anything, can be done to better ensure commitment
and support across functional areas to improve financial management at
DOD?
Mr. Khan. The DOD Comptroller has expressed commitment to the FIAR
goals, and established a focused approach that is intended to help DOD
achieve successes in the near-term. But the financial transformation
needed at DOD, and its removal from GAO's high-risk list, is a long-
term endeavor. Improving financial management will need to be a cross-
functional endeavor. The successful resolution of the weaknesses in
financial management depends on improvements in some of DOD's other
business operations such as contract management, supply chain
management, and weapon systems acquisition. As acknowledged by DOD
officials, sustained and active involvement of DOD's CMO, the DCMO, the
Military Departments' CMOs, the DOD Comptroller, and other senior
leaders is critical. Furthermore, it is paramount that DOD's ongoing
efforts to improve financial management through the FIAR plan and the
components' FIPs must be institutionalized--at all working levels--in
order for success to be achieved.
77. Senator Ayotte. Mr. Khan, there can be no doubt that effective
accountability and oversight are vital to effectively implementing
DOD's financial management and related business process reform. The
FIAR plan has established a set of review bodies for governance and
oversight of the Plan's implementation. But, what more, if anything,
can be done to ensure effective monitoring and oversight of progress--
especially by the leadership in the components?
Mr. Khan. DOD established a governance structure for the FIAR plan
that includes review bodies for governance and oversight. The
governance structure is intended to provide the vision and oversight
necessary to align FIAR efforts across DOD. To monitor progress and
hold individuals accountable for progress, DOD managers and oversight
bodies need reliable, valid, meaningful metrics to measure performance
and the results of corrective actions.
In May 2009, we reported \7\ that the FIAR plan did not have clear
results-oriented metrics. To its credit, DOD has taken action to begin
defining results-oriented FIAR metrics for use in providing visibility
of component-level progress in assessment, and in testing and
remediation activities, including progress in identifying and
addressing supporting documentation issues. We have not yet had an
opportunity to assess implementation of these metrics--including the
components' control over the accuracy of supporting data--or their
usefulness in monitoring and redirecting actions.
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\7\ GAO, Financial Management: Achieving Financial Statement
Auditability in the Department of Defense, GAO-09-373 (Washington, DC:
May 6, 2009).
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The success of the FIAR plan is dependent upon the ability of the
components to develop and implement their respective FIPs. The
components' plans are intended to guide and document financial
improvement efforts. In this regard, component senior leadership, such
as the CMO, needs to be actively involved in the oversight and
monitoring of their component's efforts to help ensure that corrective
actions are being taken to resolve the longstanding financial
management weaknesses that limit DOD's ability to produce accurate and
reliable information on the results of operations. Further, while DOD
has established a governance structure to oversee and monitor the
components' efforts, the various governance bodies must be active
participants in order for the components' FIPs to be effective in
resolving DOD's longstanding financial management weaknesses.
78. Senator Ayotte. Mr. Khan, to help drive the cultural change
through DOD that is necessary for these important initiatives to
succeed, we have to demonstrate that there is a cost for an inferior
FIAR plan or ERP transition plan. Otherwise, I believe very little will
change. In your view, what should those consequences be?
Mr. Khan. As discussed in our testimony,\8\ ensuring effective
monitoring and oversight of progress--especially by the components'
leadership--will be key to bringing about effective implementation,
through the components' FIPs. If DOD's future FIAR plan updates provide
a comprehensive strategy for completing Waves 4 and 5, the plan can
serve as an effective tool to help guide and direct DOD's financial
management reform efforts.
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\8\ GAO-11-835T.
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Effective oversight holds individuals accountable for carrying out
their responsibilities. DOD has introduced incentives such as including
FIAR goals in Senior Executive Service Performance Plans, increased
reprogramming thresholds granted to components that receive a positive
audit opinion on their SBRs, audit costs funded by OSD after a
successful audit, and publicizing and rewarding components for
successful audits. The challenge now is to evaluate and validate these
and other incentives to determine their effectiveness and whether the
right mix of incentives has been established.
79. Senator Ayotte. Mr. Khan, can any type of budgetary
consequence, for example, be useful?
Mr. Khan. The FIAR plan has established various milestones to mark
when specific actions are to be completed as DOD continues to work on
its two priority areas--budgetary information and asset accountability.
The FIAR plan has also identified specific timeframes for when DOD's
various ERP efforts are going to be implemented. DOD has stated that
these system efforts are critical to achieving auditability.
Congressional hearings on the ability of DOD to achieve these
milestones would be one way to encourage the development of
quantitative measures on the progress being made to achieve
auditability. These hearings could also be used by Congress to assess
whether continued funding of certain efforts is worthwhile.
As noted in our testimony,\9\ effective oversight holds individuals
accountable for carrying out their responsibilities. DOD has introduced
incentives such as including FIAR goals in Senior Executive Service
Performance Plans, increased reprogramming thresholds granted to
components that receive a positive audit opinion on their SBRs, funding
of audit costs by the OSD after a successful audit, and publicizing and
rewarding components for successful audits. To determine their
effectiveness and whether the right mix of incentives has been
established, DOD needs to evaluate and validate these and other
incentives, including the possibility of other organization-based
incentives such as incentives or disincentives to DOD components based
on results.
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\9\ GAO-11-835T.
SKILLED WORKFORCE
80. Senator Ayotte. Mr. Khan, there can be no doubt that effective
financial management in the Federal Government today requires a
knowledgeable and skilled workforce that includes individuals who are
trained and certified in accounting, well-versed in government
accounting practices and standards, and experienced in information
technology. While the authority to hire HQEs was put in place for DOD
to go find private sector experts who have experiences with ERP
business systems and mergers and acquisitions, my sense is that DOD
has, instead, been using that unique authority to hire the same types
of civilians who should be brought under the regular general service/
senior executive service schedule. Do you agree?
Mr. Khan. While DOD's fiscal year 2009 Strategic Civilian Human
Capital Plan mentions some use of the HQEs,\10\ we have not assessed
how DOD has implemented this authority. Specifically regarding the
plan, DOD noted that authorities for the Intergovernmental Personnel
Act\11\ and HQEs are used as an avenue to fill some positions with
highly technical requirements, but neither authority can be used to
fill continuing positions. This results in a high turnover rate and
lack of stability for work that is continuing. It also states that, in
areas of emerging science, medical technologies, and information
technology, DOD has supplemented its Federal workforce with both HQEs
and contractor personnel. According to the 2009 plan, since September
11, 2001, and the beginning of the Overseas Contingency Operations,
contractors and HQEs have commonly been used to fill gaps in expertise
in the Federal DOD workforce. However, it further stated that the HQE
authority had some stringent guidelines and could not be used to
address all gaps. While we note that the 2009 plan discussed DOD's use
of such authorities for some of its functional communities, to date, we
have not assessed the extent to which or how this authority has been
used by DOD, particularly in the area of financial management.
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\10\ 5 U.S.C. Sec. 9903.
\11\ 5 U.S.C. Sec. Sec. 3371-3376.
81. Senator Ayotte. Mr. Khan, what more, if anything, can be done
to ensure that DOD hires and retains the skilled workforce needed for
it to successfully transform its business operations to become
efficient, effective, and accountable?
Mr. Khan. Effective financial management in DOD will require a
knowledgeable and skilled workforce that includes individuals who are
trained and certified in accounting, well-versed in government
accounting practices and standards, and experienced in information
technology. Hiring and retaining such a skilled workforce is a
challenge DOD must meet to succeed in its transformation to efficient,
effective, and accountable business operations. The NDAA for Fiscal
Year 2006 \12\ directed DOD to develop a strategic plan to shape and
improve DOD's civilian workforce. The plan was to, among other things,
include assessments of: (1) existing critical skills and competencies
in DOD's civilian workforce; (2) future critical skills and
competencies needed over the next decade; and (3) any gaps in the
existing or future critical skills and competencies identified. In
addition, DOD was to submit a plan for developing and reshaping the
civilian employee workforce to address any identified gaps. The plan
was to include specific recruiting and retention goals and strategies
on how to train, compensate, and motivate civilian employees. In
developing the plan, DOD identified financial management as one of its
enterprise-wide mission-critical occupations.
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\12\ Pub. L. No. 109-163, div. A, Sec. 1122, 119 Stat. 3136, 3452
(Jan. 6, 2006). The NDAA for Fiscal Year 2010 made this strategic plan
into an annual requirement. Pub. L. No. 111-84, div. A, Sec. 1108, 123
Stat. 2190, 2488 (Oct. 28, 2009), codified at 10 U.S.C. Sec. 115b.
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In July 2011, we reported \13\ that DOD's 2009 overall civilian
workforce plan had addressed some legislative requirements, including
assessing the critical skills of its existing civilian workforce.
Although some aspects of the legislative requirements were addressed,
DOD still has significant work to do. For example, while the plan
included gap analyses related to the number of personnel needed for
some of the mission-critical occupations, DOD had only discussed
competency gap analyses for three mission-critical occupations--
language, logistics management, and information technology management.
A competency gap for financial management was not included in DOD's
analysis. Until DOD analyzes personnel needs and gaps in the financial
management area, it will not be in a position to develop an effective
financial management recruitment, retention, and investment strategy to
successfully address its financial management challenges.
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\13\ GAO, DOD Civilian Personnel: Competency Gap Analysis and Other
Actions Needed to Enhance DOD's Strategic Workforce Plans, GAO-11-827T
(Washington, DC: July 14, 2011).
STATEMENT OF BUDGETARY RESOURCES
82. Senator Ayotte. Secretary Morin, exactly how is the Air Force
planning to get an audit of its SBR 2 years after the Army is planning
to and 4 years after the Navy?
Secretary Morin. The Air Force schedule for auditing its SBR is
within the timeframe established in the 2010 NDAA. The first step in
the process is to evaluate the current state of processes and systems
and determine the necessary corrective actions. The constraining
factors on the Air Force schedule are primarily related to financial
systems modernization. We have accelerated aspects of our audit
readiness efforts, such as budget authority, and continue to look for
other opportunities to reach audit readiness sooner. We are proceeding
in a methodical fashion to reduce the risk of not meeting the 2017
deadline.
83. Senator Ayotte. Secretary Morin, what has the Air Force learned
from the Marine Corps' success and how have those lessons been
incorporated?
Secretary Morin. The Air Force reviewed the Management Letter from
the Marine Corps' audit. We looked at each finding and evaluated its
relevance to the Air Force. Of the 71 findings, our initial review
determined that 68 items could possibly impact the Air Force. As we
evaluate systems and processes, we continue to keep the findings from
the Marine Corps' audit efforts in mind, ensuring our review is as
complete as possible.
84. Senator Ayotte. Secretary Morin, at this point, what's the most
significant impediment to the Air Force's ability to get its SBR audit
ready?
Secretary Morin. Perhaps the greatest challenge is the state of the
legacy systems. While many of our systems allow the Air Force to
efficiently manage its operations, they do this at the expense of
transparency. We are unable to pull the detailed transactions from many
systems that are necessary to support the summary level balances. In
order to rectify these shortcomings, the Air Force is relying on a
systems modernization effort that includes replacement of legacy
systems with ERP systems, as well as cost-effective system enhancements
and process improvements to provide the necessary detail in certain
legacy systems. For example, we recently implemented a standard
document numbering policy in our legacy accounting system that will
allow us to perform a detailed reconciliation on our Budget Authority.
We are continuing to look at legacy system enhancements as we develop
our ERP systems.
ARMY'S ENTERPRISE RESOURCE PLANNING SYSTEMS
85. Senator Ayotte. Secretary Matiella, DOD's FIAR plan has a
strong emphasis on the implementation of GFEBS, as the cornerstone of
your audit readiness strategy. But GFEBS, which covers the General Fund
of the Army, represents only part of the Army. It doesn't include any
of the Army's Working Capital Fund, which is measured in tens of
billions of dollars annually. I understand that most of that activity
is going to occur in another system called the LMP, which is managed
out of Army Materiel Command. The DOD Inspector General (IG) has,
however, been particularly critical of LMP for its compliance regarding
financial management controls. What is your role in overseeing LMP and
ensuring that it meets the same financial standards and requirements as
GFEBS?
Secretary Matiella. I am responsible for ensuring LMP financial
functionality meets audit standards and requirements. My staff oversees
Army Materiel Command actions to ensure LMP meets financial compliance
standards and that the problems identified in the DOD IG audit are
addressed. This oversight has achieved positive results. We have
updated LMP's general ledger to include the missing accounts identified
by the audit. We have identified requirements for compliance with DOD's
Standard Financial Information Structure (SFIS), and are on track to
add these requirements to LMP's baseline in fiscal year 2012. We have
included LMP and working capital fund requirements in our FIP to ensure
management controls, business process, and systems for both meet audit
readiness requirements. We will continue to work with the auditors to
identify problems and initiate corrective actions to ensure LMP is
audit ready by fiscal year 2017.
86. Senator Ayotte. Secretary Matiella, LMP has already been
deployed to parts of the Army for a few years now. Have any auditors
examined that system and provided any feedback on its ability to
support a financial audit?
Secretary Matiella. My office is working closely with Army Audit
Agency to ensure LMP complies with the financial systems requirements
of the FFMIA of 1996. The audit agency examined LMP in 2007, and
reported the system substantially complied with the 757 applicable
FFMIA requirements. Now that LMP is fully deployed, we have engaged the
audit agency to perform a follow-on FFMIA compliance audit that will
test 1,298 requirements. The requirements growth is attributable to
functionality added to the LMP baseline since 2007, and the growth in
DOD's compliance criteria. Additionally, we have included LMP and
working capital fund requirements in our FIP to ensure management
controls, business process, and systems for both meet audit readiness
requirements.
87. Senator Ayotte. Secretary Matiella, I understand that the Army
is buying two logistics ERPs--the LMP system and the GFEBS-Army. Why?
Secretary Matiella. The LMP system is the logistics and financial
management system for the Army Working Capital Fund, which is a
separate legal entity from the Army General Fund. The Working Capital
Fund conducts business that is very different from the General Fund.
The LMP system provides logistics and inventory support for the Army's
depots, arsenals, and wholesale supply facilities. LMP will serve as
the general ledger for the Army's Working Capital Fund. The GFEBS
supports the Army's General Fund business and financial reporting
requirements.
88. Senator Ayotte. Secretary Matiella, why is the Army buying one
logistics ERP for ground logistics and the Marine Corps is buying a
completely separate one, made by a different company, so that the two
systems will be unable to work together?
Secretary Matiella. GCSS-MC and GCSS-Army will be interoperable
just as Army and Marine Corps systems interoperate today--they will be
perfectly capable of passing transactions back and forth to one
another. However, it is important to realize that less than 1 percent
of the transactions occurring within Army logistics systems involve the
Marine Corps. Most of the Army's logistics transactions (tens of
thousands daily) are within Army Enterprise Systems, or with the DLA,
all of which run the same commercial software, SAP. It is far more
important that the Army and DLA work together than it is to optimize
Army systems with the Marine Corps. Also, GCSS-A and GFEBS use the same
SAP software and share a common financial design, including a standard
general ledger configuration, to ensure auditability and financial
interoperability between the two systems. An initial review estimates
moving Army to GCSS-MC would increase life cycle costs substantially
and would place the Army's ability to be auditable by fiscal year 2017
at significant risk.
89. Senator Ayotte. Secretary Matiella, what is the cost per
transaction and cost per user of the legacy systems versus the ERP
systems?
Secretary Matiella. Prior to initiating an ERP development effort,
an economic analysis is performed to justify investment in the ERP.
Each economic analysis is subject to multiple reviews, and is
ultimately approved by DOD's CAPE organization. The economic analysis
documents the cost and justifies the economic benefit of the ERP
development. The ERP systems have many different types of transactions
that are more complex than those in the legacy environment, making a
cost per transaction comparison very difficult. For example, the ERP
systems track cost, asset values, and expenses at the transaction
level. This capability is not present in the legacy environment. Unlike
the legacy systems, the ERP systems provide integrated general ledger
capabilities, updating the general ledger instantly at the transaction
level. Many general ledger updates in the legacy environment are done
at a summary level, a practice that will not pass audit scrutiny.
Although transactional complexity is greater in the ERP environment,
this complexity is necessary to achieve DOD's audit readiness goals,
and to provide transparent cost and financial information for use by
managers and review by auditors.
______
Questions Submitted by Senator John McCain
DEFENSE FINANCIAL MANAGEMENT METRICS
90. Senator McCain. Secretary Hale and Mr. Khan, during the
Readiness and Management Support Subcommittee of the Senate Armed
Service Committee hearing, Secretary Hale said that DOD is doing well
on financial management, citing the relatively low levels of Anti-
Deficiency Act (ADA) violations at DOD as compared with other Federal
agencies. Specifically, you mentioned that only 20 cents of every
$1,000 appropriated to DOD were in violation of the ADA--much lower
than other agencies. You also stated that DOD pays its bills on time
and avoids interest payments--another indicia of sound financial
management. If these are the only important indicia of sound financial
management, why, in your view, has DOD remained on GAO's High-Risk List
for its financial management since 1995?
Secretary Hale. I continue to strongly feel that we have
``islands'' of excellence, and elements of our process tied to our
stewardship culture--ADAs and timely payments are two. While these are
important indicators of sound financial management, they are certainly
not the only ones. Broadly, a financial audit opinion is the most
comprehensive and important indicator and it is something that DOD has
not yet achieved. Being able to achieve auditability would ensure that
we had eliminated the kind of systemic weakness that have kept us on
the GAO High-Risk List to date. Therefore, we will continue to focus on
these two indicators, while also focusing on the broader objective of
achieving auditability.
Mr. Khan. These are two indicators that are important, but provide
information about narrow aspects of DOD financial management.
Furthermore, the 13 material weaknesses in financial management
reported by the DOD auditors,\14\ and the lack of audit assurance and
reliability surrounding DOD's financial information, call into question
the completeness and accuracy of these two measures.
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\14\ DOD's auditors have reported material financial management
weaknesses in the following areas: (1) Financial Management Systems,
(2) Fund Balance with Treasury, (3) Accounts Receivable, (4) Inventory,
(5) Operating Materials and Supplies, (6) General Property, Plant, and
Equipment, (7) Government-Furnished Material and Contractor-Acquired
Material, (8) Accounts Payable, (9) Environmental Liabilities, (10)
Statement of Net Cost, (11) Intragovernmental Eliminations, (12) Other
Accounting Entries, and (13) Reconciliation of Net Cost of Operations
to Budget.
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Also, discussed in our testimony,\15\ numerous challenges must be
addressed in order for DOD to successfully reform its financial
management operations. One of those challenges is the development and
implementation of an effective plan to correct internal control
weaknesses. Internal control comprises the plans, methods, and
procedures that serve as the first line of defense in safeguarding
assets and preventing fraud. In May 2009, we reported \16\ that the
FIAR plan had not established a baseline of DOD's state of internal
control and financial management weaknesses. Such a baseline is used to
plan for and assess improvements and remediation. DOD currently has
efforts underway to address known internal control weaknesses through
three integrated programs: (1) Internal Controls over Financial
Reporting (ICOFR) program; (2) ERP implementation; and (3) the FIAR
plan. However, the effectiveness of these three integrated efforts in
establishing a baseline remains to be seen.
---------------------------------------------------------------------------
\15\ GAO-11-835T.
\16\ GAO-09-373.
---------------------------------------------------------------------------
Furthermore, the success of the Military Services' ability to
achieve audit readiness of their SBR should help provide broader
measures of DOD's financial management effectiveness. The DOD
Comptroller has indicated that one of the highest priorities in
improving financial management is the improvement of the budgetary
information and processes underlying the SBR. A successful SBR audit is
an important tool in providing accountability and discipline over the
budgetary resources provided by Congress.
91. Senator McCain. Mr. Khan, what metrics does GAO use to make
this determination for high risk, both generally and with respect to
DOD's financial management?
Mr. Khan. GAO maintains a program to focus attention on government
operations that it identifies as high risk due to their greater
vulnerabilities to fraud, waste, abuse, and mismanagement. An
individual performance and accountability challenge merits a GAO high-
risk designation when it involves a program or mission area having
national significance or a management function that is key to
performance and accountability. We then determine whether the risk
stems from an inherent risk, which may arise when the nature of a
program creates susceptibility to fraud, waste, and abuse, or a
systemic problem, which may arise when programmatic, management
support, or financial systems, policies, and procedures established by
an agency are ineffective.
We also consider qualitative and quantitative factors. Qualitative
factors include whether the risk is seriously detrimental to the Nation
in areas that include, for example, health or safety or national
defense. We also consider potential results of the risk, such as
significantly reduced effectiveness and efficiency; injury or loss of
life; unreliable decisionmaking data; reduced confidence in government;
misuse of sensitive information; or program failure. In addition to
qualitative factors, we consider the exposure to loss in monetary or
other quantitative terms. A minimum of $1 billion must be at risk in
areas such as:
the value of major assets;
revenue sources (e.g., taxes due) not being realized;
improper payments; and
contingencies or potential liabilities (e.g.,
environmental cleanup).
Before assigning a high-risk designation, we determine and assess
the effectiveness of an agency's planned and ongoing corrective actions
to address a material weakness. This assessment considers whether the
agency has demonstrated commitment to resolving the problem, progress
in addressing the problem, appropriate corrective action planning, and
solutions that will be substantially completed near-term and will
resolve the root cause of the problem. These criteria and other
elements of the assessment of programs for designation as high risk,
and for removal from the list, are discussed further in GAO's
Determining Performance and Accountability Challenges and High
Risks.\17\
---------------------------------------------------------------------------
\17\ GAO, Determining Performance and Accountability Challenges and
High Risks, GAO-01-159SP (Washington, DC: November 2000).
---------------------------------------------------------------------------
With regard to the designation of DOD's financial management as
high risk, the area meets the criteria as a program and a mission area
of national significance and as a management function that is key to
performance and accountability. Long-standing and pervasive weaknesses
in DOD's financial management and related business processes and
systems have: (1) resulted in a lack of reliable information needed to
make sound decisions and report on the financial status and cost of DOD
activities to Congress and DOD decisionmakers; (2) adversely impact its
operational efficiency and mission performance in areas of major
weapons systems support and logistics; and (3) left DOD vulnerable to
fraud, waste, and abuse.
The financial transformation needed at DOD, and its removal from
GAO's high-risk list, will be a long-term effort. Improving financial
management needs to be a cross-functional endeavor. The successful
resolution of the weaknesses in financial management depends on
improvements in some of DOD's other business operations such as
contract management, supply chain management, and weapons systems
acquisition. As acknowledged by DOD officials, sustained and active
involvement of DOD's CMO, the DCMO, the Military Departments' CMOs, the
DOD Comptroller, and other senior leaders is critical.
GENERAL FUND ENTERPRISE BUSINESS SYSTEMS
92. Senator McCain. Ms. McGrath, during the Readiness and
Management Support Subcommittee of the Senate Armed Services Committee
hearing, Mr. Hale mentioned several times that the Army's GFEBS was
undergoing an audit check. He also said, ``I don't want to get all
these ERP systems deployed at great cost and in considerable time find
out we're not using them in the right way.'' With this in mind, why did
you approve GFEBS full deployment last month before this audit was
completed and before evaluating the results of that audit?
Ms. McGrath. In June 2011, I approved a Full Deployment Decision
(FDD) for GFEBS because the program met the criteria established in the
Acquisition Program Baseline and had successfully completed an
Independent Operational Test and Evaluation. I recognize the importance
of the financial audit to DOD however and as part of the FDD, I levied
specific audit related criteria that the Army must meet before
declaring GFEBS fully deployed.
ARMY VS. MARINE CORPS ENTERPRISE RESOURCES PLANNING SYSTEMS
93. Senator McCain. Ms. McGrath, you stated that the reason the
Army and Marine Corps have two very different, but similar sounding,
ERP systems for logistics was that they were: ``embedded into very
different I'll say business processes that they execute their both
supply and maintenance infrastructures. So although they sound very
much the same, they do operate within two very different
infrastructures and processes and they are not one-for-one used by the
same people. And so, although, as I mentioned, they sound very similar,
there's a lot more detail behind the execution of those systems and
those capabilities that those systems enable.'' Why do the Army and
Marine Corps, both ground military forces with similar equipment and
doctrine, have very different processes?
Ms. McGrath. The way the systems are employed is tactically
different. For example, the Marine Corps system requires servers to be
placed on ships and taken ashore when operations require traversing
long distances inland. This distributed architecture is needed because
the Marine Corps does not have the robust satellite-based networking
capability that the Army has in every battalion throughout its force
structure.
94. Senator McCain. Ms. McGrath, did they not go through BPR under
the direction of your office before the adoption and installation of
their billion dollar ERPs?
Ms. McGrath. Most of the large ERP investments predate the decision
to create the DCMO as well as the NDAA provision that requires the DCMO
or Military Department CMO to make BPR determinations. However, the
DCMO is involved with the Army's ongoing ERP Strategy review, which is
continuously seeking to improve its business processes leveraging its
ERP implementations.
95. Senator McCain. Ms. McGrath, will the Army and Marine Corps
continue to maintain very different business processes for logistics,
maintenance, and supply functions? If so, why?
Ms. McGrath. Yes, I believe the Army and Marine Corps will continue
to maintain different business processes for logistics, maintenance,
and supply functions. GCSS-Army and GCSS-Marine Corps have very
different mission and system requirements, even though they do perform
some similar core logistics functions. The primary differences are
scale of operations, interoperability with other Service-component
systems, and financial reporting processes. However, the two systems
will interoperate to the degree necessary to conduct joint operations.
96. Senator McCain. Ms. McGrath, what plan, if any, is there to
subject those processes to BPR?
Ms. McGrath. I will look for opportunities where it makes sense to
drive common business processes across DOD. For example, I am
establishing an enterprise architecture to determine the feasibility of
leveraging the Military Services' processes in our end-to-end business
cycles. The Services' business systems will then be compared to the
established process to focus project execution and enable trade-offs
across a portfolio to reduce redundancy and effectively align resources
to deliver valued mission capabilities. The business processes between
the Army and Marine Corps are more different than alike and to adopt a
standard set of processes prematurely would drastically affect each
organization's ability to organize, train, equip, and operate in
support of the combatant commanders.
97. Senator McCain. Ms. McGrath, there may be a case for the Navy
and Air Force having different logistics needs as ships and planes are
very different. But, how are the Marine Corps and Army so different
that they need separate, wholly incompatible billion-dollar ERP systems
that are supposed to be modeled after commercial best practices?
Ms. McGrath. The primary differences are related to complexity and
scope. The GCSS-Army system supports a customer base much greater than
the GCSS-Marine Corps system (four times more people and equipment) and
provides much greater functionality resident in the system. GCSS-Army
Increment I provides the tactical warfighter with supply, maintenance,
ammunition, property accountability, integrated materiel management
center, management functionality, and support to tactical financial
processes. GCSS-Marine Corps Increment 1 provides Combat Service
Support functionality: Supply, Maintenance, Task Organization, and
Request Tracking in a shared data environment in support of deployed
operations.
Additionally, there are numerous situations where the Army and the
Marine Corps have been working together to improve systems
interoperability. For example, in Iraq and Afghanistan the legacy
Standard Army Retail Supply System and Marine Corps Supported
Activities Supply System interoperate today. Legacy operations over the
last 12 months have resulted in over 6,000 orders with a 92 percent
fill rate out of over 19.6 million overall supply transactions.
Further, the interaction between the Army and Marine Corps in the
greater logistics area is a relatively small (less than .03 percent of
Army transactions in the past 6 months), whereas the interaction within
the Army and with the DLA makes up the vast majority of the workload.
As a result, the emphasis has been to improve the interoperability
between the Army and DLA.
98. Senator McCain. Ms. McGrath, please provide the Analysis of
Alternatives (AoA) that the Army used in determining to not implement
the Marine Corps' ERP solution.
Ms. McGrath. The AoA for the GCSS-Army is attached.
[See annex printed at the end of this hearing].
99. Senator McCain. Ms. McGrath, when will OSD adopt the DAI to
manage its business processes?
Ms. McGrath. The activity that supports OSD, WHS, is scheduled to
begin implementation of DAI in fiscal year 2015 and complete
implementation in early fiscal year 2016.
100. Senator McCain. Ms. McGrath, shouldn't OSD lead the way with
ERP implementation?
Ms. McGrath. OSD is currently supported by WHS. WHS is scheduled to
begin implementation of DAI in fiscal year 2015 and complete
implementation in early fiscal year 2016. Acceleration of the schedule
to accommodate a small number of employees moving from the BTA into OSD
would be extremely challenging and provide increased risk to the
established workload. The DAI implementation schedule includes the
deployment of multiple sites over the next few years and program
resources have been allocated to meet this schedule. Additionally, the
specific sites are currently preparing for implementation, which
includes data cleansing efforts, training, and BPR. Further, in
addition to the increased risk, additional resources would be required
to accelerate. I intend to leverage lessons learned within the defense
agencies when deploying DAI across OSD.
101. Senator McCain. Ms. McGrath, how can the CMO convince the
Military Services and other agencies through change management to adopt
ERPs and turn off legacy systems while they continue to use their
legacy system?
Ms. McGrath. Each of the Services is committed to the
implementation of ERPs in order to modernize their business system
environments and drive toward audit readiness. However, turning off
legacy systems remains a challenge. That said, there has been recent
progress in sunsetting legacy systems. For example, the fielding of
Navy ERP has enabled the retirement of 27 systems to date, with 69 more
planned by 2016. Additionally, DOD is using the tools provided by
Congress in 10 U.S.C. section 2222, such as the IRBs, the BEA, and the
ETP, to ensure that legacy systems are being turned off as new
capability comes online. However, section 2222, as written, focuses
exclusively on development and modernization (i.e., new systems), and
not legacy systems in sustainment. The changes to section 2222 under
consideration by the Congressional Defense Committees in the NDAA for
Fiscal Year 2012 could provide DOD with a more effective tool to drive
the retirement of DOD legacy systems.
______
ANNEX
[The Analysis of Alternatives for the Global Combat Support
System-Army, follows:]
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[Whereupon, at 4:09 p.m., the subcommittee adjourned.]
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