[Senate Hearing 112-658]
[From the U.S. Government Printing Office]
S. Hrg. 112-658
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
SECOND SESSION
__________
APRIL 18, 2012
__________
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
Ann E. Sauer, 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
april 18, 2012
Page
Hale, Hon. Robert F., Under Secretary of Defense (Comptroller)... 6
McGrath, Hon. Elizabeth A., Deputy Chief Management Officer,
Department of Defense.......................................... 7
Westphal, Hon. Joseph W., Chief Management Officer of the Army;
Accompanied by Hon. Mary Sally Matiella, Assistant Secretary of
the Army, Financial Management and Comptroller................. 15
Work, Hon. Robert O., Chief Management Officer of the Navy;
Accompanied by Hon. Gladys J. Commons, Assistant Secretary of
the Navy, Financial Management and Comptroller................. 19
Morin, Hon. Jamie M., Assistant Secretary of the Air Force,
Financial Management and Comptroller; Accompanied by David
Tillotson III, Deputy Chief Management Officer of the Air Force 22
Khan, Asif A., Director, Financial Management and Assurance,
Government Accountability Office............................... 29
(iii)
FINANCIAL MANAGEMENT AND BUSINESS TRANSFORMATION AT THE DEPARTMENT OF
DEFENSE
----------
WEDNESDAY, APRIL 18, 2012
U.S. Senate,
Subcommittee on Readiness and
Management Support,
Committee on Armed Services,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:35 p.m. in
room SD-G50, Dirksen Senate Office Building, Senator Claire
McCaskill (chairman of the subcommittee) presiding.
Committee members present: Senators McCaskill, Manchin, and
Ayotte.
Majority staff members present: Peter K. Levine, general
counsel; and Jason W. Maroney, counsel.
Minority staff members present: Pablo E. Carrillo, minority
general counsel; Lucian L. Niemeyer, professional staff member;
and Bryan D. Parker, minority investigative counsel.
Staff assistants present: Jennifer R. Knowles, Kathleen A.
Kulenkampff, and Mariah K. McNamara.
Committee members' assistants present: Stephen Hedger,
assistant to Senator McCaskill; Mara Boggs, assistant to
Senator Manchin; and Brad Bowman, assistant to Senator Ayotte.
OPENING STATEMENT OF SENATOR CLAIRE McCASKILL, CHAIRMAN
Senator McCaskill. The Senate Armed Services Committee
Subcommittee on Readiness and Management Support will begin
this hearing.
This is a hearing that we do on an annual basis. Some have
likened it to going to the dentist and having your teeth
drilled. As I said to the staff as I walked in, this is the
kind of hearing that people who love wonky should really
gravitate towards, because this is a subject matter that
clearly is complicated, and difficult, and in some ways
tedious, but it is obviously going to take a great deal of
tenacity, which I know our military is capable of, in terms of
getting this right. This is our annual effort to look at the
financial management and business transformation at the
Department of Defense (DOD).
We are pleased to be joined by the Comptroller today--and I
appreciate that--the DOD Deputy Chief Management Officer (CMO),
and the CMOs and Chief Financial Officers (CFO) of all three
military departments--I think we have one missing because of an
injury, but we understand that--and the Director of Financial
Management and Assurance at the Government Accountability
Office (GAO).
This witness list makes for a long witness table. In fact,
we had to change rooms to accommodate all of you. However, with
both the CMOs and the CFOs present, we have the full range of
senior officials responsible for DOD financial management and
business transformation before us at one time. This would not
have been possible as recently as 5 years ago because DOD was
unable to tell us who the responsible officials were.
I am particularly pleased by the presence of the Service
Under Secretaries today, which reflects both their personal
commitment to the issues of financial management and business
transformation, and the positive impact that our legislation
establishing them as the CMOs of their departments has already
begun to show.
Welcome to all of you and thank you for your participation
in this important hearing.
Last October, the Secretary of Defense announced that he
had directed DOD to accelerate its schedule to achieve audit
readiness for its Statement of Budgetary Resources (SBR),
moving the deadline from fiscal year 2017 to fiscal year 2014.
Secretary Panetta stated that ``we owe it to the taxpayers to
be transparent and accountable for how we spend their dollars''
and acknowledged that this will require DOD to change the way
it does business. I could not agree with him more.
It will not be easy for DOD to meet the 2014 deadline. Even
as the military departments have accelerated milestones for
future years in an effort to meet the new requirement, DOD's
most recent update on its Financial Improvement and Audit
Readiness (FIAR) plan indicates that it has fallen behind on a
number of milestones that were supposed to be achieved this
year.
In the past, DOD has relied heavily on the fielding of
Enterprise Resource Programs (ERP) to achieve auditability.
This approach has always been problematic both because of DOD's
dismal track record in fielding new business systems, and
because new business systems alone will never solve the
financial management problems without accompanying changes to
business processes, internal controls, and culture.
The 2014 deadline makes it difficult, if not impossible,
for DOD to continue to rely on ERPs to solve its management
problems. Senior Air Force officials have already acknowledged
that they will not be able to rely on ERPs to meet the 2014
deadline since the three Air Force ERPs are not scheduled to be
fully deployed until 2016 and 2017. The Army and Navy plan to
field their core financial ERPs in 2012 and 2013--but other
critical Army and Navy systems, including the Integrated Pay
and Personnel System (IPPS)-Army, Global Combat Support System
(GCSS)-Army, IPPS-Navy, and GCSS-Marine Corps--are not
scheduled to be fully deployed until 2017 or do not yet even
have deployment dates established.
DOD's inability to rely on ERPs as a cure-all for its
financial management problems could result in lasting
improvements if DOD seizes this opportunity to refocus its
attention on needed changes to underlying business processes
and internal controls. If DOD conducts end-to-end analyses of
its business processes, identifies needed internal controls,
and makes the cultural and process changes required to
implement those controls, it should be able to make real
progress towards sound financial management even before the
fielding of new ERPs.
If, on the other hand, it relies on one-time fixes and
manual work-arounds in an effort to meet the 2014 deadline, it
could spend significant amounts of money without addressing the
underlying financial management problems. Even worse, if DOD
pushes for audit reviews before its systems and processes are
ready, it could spend huge sums to hire an army of auditors
without moving any closer to a long-term solution.
I hope we will hear a commitment from our witnesses today
to focus on needed changes to DOD's business systems and
culture and to avoid a short-term fix that could delay rather
than expedite the real objective of developing timely, accurate
data on which sound management decisions can be based.
If we fail to address this issue, DOD will remain at risk
of sending the wrong paychecks to soldiers in the field,
wasting taxpayers' money on improper payments and overdue
bills, being unable to account for billions of dollars in
funding, and making critical management decisions on the basis
of unsupportable financial information. Sound business
processes 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.
I now will turn it over to Senator Ayotte for a statement,
if she would like to make any opening remarks.
STATEMENT OF SENATOR KELLY AYOTTE
Senator Ayotte. Thank you very much, Madam Chair.
I want to welcome our witnesses for being here today and
thank them for their hard work.
This is our annual hearing on the defense financial
management and business transformation in as many years, and I
commend you. I want to commend the chairman for continuing to
make better financial stewardship at DOD a significant and
major priority for this important subcommittee.
Today's hearing drives at the heart of the fiscal crisis we
face as a Nation: how the Federal Government spends taxpayers'
dollars. We must closely scrutinize spending at every Federal
agency, including DOD, to identify and eliminate waste and
duplication. However, as I have said in the past, we must
ensure that budget cuts at DOD do not undercut our warfighters
or endanger our readiness for future contingencies. To
distinguish between necessary budget cuts and cuts that would
harm our troops and damage military readiness, we must have
reliable financial data and effective business processes and
systems. Every wasted dollar is a dollar we deprive our
warfighters of as they seek to protect and defend our country.
A recent finding by GAO illustrates how important it is to
reform financial management at DOD and how DOD does business.
According to the GAO report released just last month, the total
acquisition costs of DOD's 96 largest weapons procurement
programs grew by over $74 billion, or 5 percent, just over last
year's amounts. In the midst of our Nation's fiscal crisis and
tightening defense budgets, we can--and must--do better.
One specific area of financial management that should be
reformed relates to the proliferation of requests to transfer
funds among defense accounts. I appreciate that DOD needs the
budgetary flexibility to respond to emergent, higher-priority
needs for our warfighters engaged in hostilities. But we have
been seeing a migration of funds for new, unauthorized programs
not tied to the war and a frenzy in the last 30 days of the
fiscal year to spend taxpayers' funds before they expire,
regardless of the urgency of the requirements that the money is
being spent on. Neither of these trends are conducive to a
healthy, transparent financial management system and must be
addressed in an era of declining defense budgets.
To his credit, shortly after taking office, Secretary
Panetta elevated financial management at DOD to make it a
priority. Secretary Panetta directed DOD to cut in half the
time it would take to achieve audit readiness of a key
financial statement, the SBR. I fully support this goal which
would achieve an audit-ready SBR by 2014.
In fact, I introduced legislation last year that would have
required by statute that DOD meet this goal. That is how
important I think it is. My proposal passed the Senate Armed
Services Committee and the Senate unanimously but was,
unfortunately, not included in the final conference report. I
hope we can revisit this important priority this year in the
National Defense Authorization Act (NDAA), and I certainly plan
to bring this forward.
From our witnesses, I would like to hear their assessments
of whether each of the Services is on track to meet the 2014
goal. I am particularly interested in getting an update on the
Air Force's progress on this because we know that the Air Force
has had some difficulty on this particular aspect of meeting
the audit readiness goal of 2014 for the SBR.
I am also interested in hearing about DOD's efforts to
ensure that steps being taken now to achieve auditability will
be repeatable in future years. Spending billions of dollars for
a one-time effort to achieve auditability that cannot be used
in the future makes absolutely no sense. We want to be able to
use this information year-to-year and make it valuable for you.
Such a short-sighted approach would waste billions of dollars
and not solve DOD's longer-term financial issues.
While much work remains to achieve the ultimate goal of
full audit readiness for 2017, DOD has achieved some
encouraging progress, and I want to commend you for that.
Notably, some of DOD components, including the Army Corps of
Engineers, have received clean audit opinions. By contrast, the
Marine Corps received a qualified audit opinion of its SBR from
the DOD Inspector General (IG). It is imperative that those DOD
components work toward clean opinions like the Marine Corps. We
would like to see, of course, across the Services, that we
leverage the lessons learned from other organizations within
DOD that have succeeded to make sure that every branch
succeeds.
In testimony before Congress over the last few months, the
DOD IG has maintained that three problem areas must be resolved
before DOD will be able to meet its audit readiness goals in
2014 and in 2017. They include: the quality of DOD's financial
management data, weaknesses within its internal controls, and
implementation of its ERPs. I agree with the DOD IG's overall
observation and would certainly like our witnesses to address
each of these areas.
One area I would like to focus on is the DOD's procurement
of ERP systems, automated systems that, as the chair has
described, perform a variety of important business-related
functions crucial to meeting the goal of audit readiness. Both
GAO and the DOD IG have repeatedly reported that these new
systems, some of which cost billions of dollars to develop and
deploy, lack elements that are critical to producing auditable
financial statements such as a standard set of accounts that
match the United States standard general ledger. This requires
manual work-arounds which increases the risk of human error and
further degrades the quality of DOD's financial management
data.
DOD must successfully reengineer its inefficient business
processes and implement these ERPs in a way that allows it to
realize their intended benefits. Otherwise, it will do little
else than line the pockets of the contractors hired to
integrate these ERPs into DOD and will not reach our goal of
achieving audit readiness.
With a $1.3 trillion deficit this year, we cannot accept
the status quo with respect to DOD or anywhere in our Federal
Government. With at least $487 billion and up to a trillion in
defense reductions being looked at by this committee and by
Congress and perhaps implemented over the next decade, we
cannot afford to do without the reliable financial management
data needed to help us distinguish between defense budget cuts
that are necessary and those that may endanger our national
security.
Madam Chair, clearly there is much to discuss today, and so
I thank you so much for convening this hearing. Again, I want
to thank the witnesses for being here.
Senator McCaskill. Senator Manchin, would you like to make
a comment?
Senator Manchin. I am ready for the witnesses.
Senator McCaskill. Great. Let me go through the list of
witnesses and then I will defer to each of you to decide who
wants to testify on behalf of each Service. I certainly would
want to start with Robert F. Hale, the Under Secretary of
Defense, Comptroller. But we have here today from the Air
Force, Mr. David Tillotson III, who is the Deputy CMO of the
Air Force, and the Honorable Jamie M. Morin who is Assistant
Secretary of the Air Force of Financial Management and
Comptroller. We have from the Army, the Honorable Mary Sally
Matiella, Assistant Secretary of the Army, along with the
Honorable Joseph W. Westphal, the CMO for the Army. We have
Elizabeth A. McGrath who is the Deputy CMO at DOD. From the
Navy, we have the Honorable Robert O. Work, the CMO of the
Navy, along with the Honorable Gladys J. Commons, the Assistant
Secretary of the Navy. From GAO, all by himself, we have Mr.
Asif A. Khan, the Director of Financial Management and
Assurance for GAO.
I thank you all for being here, and I will defer to you,
Secretary Hale, to begin this process and then to defer to your
colleagues in whatever order you think is appropriate for us to
move through the various branches for their testimony.
STATEMENT OF HON. ROBERT F. HALE, UNDER SECRETARY OF DEFENSE
(COMPTROLLER)
Mr. Hale. Chairman McCaskill, Senator Ayotte, Senator
Manchin, members of the subcommittee, let me thank you for the
opportunity to talk about improvements in defense financial
management, in particular audit readiness. Let me say at the
outset this issue is important to me. If that makes me a wonk,
well then, so be it. It is something we need to do. I know that
and I think everybody at this table agrees.
Ms. McGrath and I have submitted a joint statement and we
will now summarize it jointly for you.
It has been 8 months since our last status report. In that
time, we have continued efforts across DOD. The job is not
done, I think GAO's report makes that clear. But I believe we
are on the right track. I think we are making progress and at a
faster rate, and I am reasonably confident that we will meet
our goals.
This audit effort is important for two reasons. First, we
need a clean audit to ensure that managers have accurate
financial information to make these important decisions. But
second--and I think the most important thing--we need to
reassure the public and Congress that we are good stewards of
the public funds.
Today we can account for funds appropriated to us but not
to an auditable standard. To reach that goal, more than 2 years
ago, we put in place a new focused strategy. The strategy
concentrates first on the information that defense managers
most use to manage budgetary information and accounts and
determine location of assets. That strategy has been endorsed
by GAO. It is supported, I believe, at all levels of DOD.
We also have in place a governance structure and you have
before you today many of the senior leaders who provide that
governance. Despite lean budget times, we have put aside
adequate funds to meet audit needs throughout our 5-year budget
planning period. Now we need to execute. We have to carry out
that strategy, and I think it is happening.
Let me highlight a few of our accomplishments over the last
year. I will focus on DOD-wide accomplishments because I want
to leave to my Service colleagues the many activities that they
have undertaken.
The key event in the last year was clearly Secretary
Panetta's personal endorsement of the audit effort. At that
time, he accelerated to 2014 our goal for the SBR for general
funds. His endorsement has been a game-changer. It has opened
doors I never expected to be opened, and we need to find ways
to leverage that endorsement in every way we can. I brief him
periodically at his staff meetings, and although a lot of
things, from Syria to North Korea are on his mind, he always
focuses when I bring up this topic.
As more field level managers become involved, we are moving
to tell them what needs to be accomplished. The Services have
already done a lot. They are in the process of sending out now
a checklist to all our commanders that lists the basic actions
that they need to take.
We are also developing a course-based certification program
for defense financial management professionals. One of the
goals of that is to improve audit training. Since our program
was last announced, we have made a fair amount of progress. We
will have pilots out this year, large-scale implementation next
year. We are grateful to Congress for providing the legislative
authority that we needed in the NDAA for Fiscal Year 2012.
We have also introduced a specific training program in
audit readiness and more than 1,000 DOD personnel took that
program last year.
We are working to ensure that the defense agencies have
effective programs leading to auditability of their SBRs. These
agencies account for almost 20 percent of our budget. We will
never be audit-ready without them, and so we need to bring them
along with the military departments.
We have also worked to ensure that the agencies that
provide needed services are pursuing audit efforts. The Defense
Finance and Accounting Service (DFAS) is particularly
important, but the list of key service providers includes the
Defense Logistics Agency, the Defense Contract Management
Agency (DCMA), the Defense Contract Audit Agency (DCAA), and
others.
We are partnering with other key functional areas. Here is
one case where Secretary Panetta's endorsement has helped a lot
to get other senior personnel involved. Our human resources
personnel, for example, are working to help us solve audit
issues in their areas, including some of those highlighted by
GAO in their recent audit of Army military personnel.
The efforts are bearing fruit. You mentioned some audits
that we have already achieved. The Army Corps of Engineers,
DFAS, the Defense Commissary Agency (DeCA), the DCAA, all have
audit opinions. The Defense Information Systems Agency recently
achieved a clean opinion on $6.6 billion of their working
capital funds. The TRICARE Management Activity received an
unqualified opinion on last year's statements.
There have also been many key Service-specific initiatives,
and I want to leave them to my colleagues.
To achieve and sustain financial management improvement, we
have to change our business practices. We are with you there
and we are doing it. But we need better financial systems as
well, especially to sustain this effort at a reasonable price.
So let me now ask Beth McGrath, the DOD's Deputy CMO, to
complete our joint oral statement by describing our system
efforts.
STATEMENT OF HON. ELIZABETH A. McGRATH, DEPUTY CHIEF MANAGEMENT
OFFICER, DEPARTMENT OF DEFENSE
Ms. McGrath. Thank you.
Like Mr. Hale, I appreciate your personal engagement in,
and oversight of, these important issues.
Like the private sector, DOD is focused on smarter, leaner,
knowledge-based management and optimization of both processes
and technology. Our efforts to improve financial management and
achieve auditability are part of this broader effort to improve
our business operations and deliver maximum value to the
warfighter and the taxpayers.
Since we last testified before this panel in July of last
year, we have taken a number of steps to improve our
overarching business environment. Our strategic management plan
reflects business initiatives, including audits, each with
specific goals, metrics, and milestones so that progress may be
tracked. To enable the successful execution of these
initiatives, we have developed a map which highlights
interdependencies among them.
Additionally, we continue to evolve the business enterprise
architecture by further defining across functional and end
processes, adding additional standards that enable
interoperability, and improve usability.
With regard to systems, we acknowledge that there have been
and continue to be challenges with many of our business system
implementations. However, to improve business operations, we
must transition away from labor-intensive, paper-based, siloed
processes to more streamlined technology-enabled approaches.
In that regard, I wish to highlight a number of ongoing
efforts.
Our streamlined approach to acquisition of business
information technology continues to be implemented across DOD.
We are implementing and have implemented better and more
performance-based measures that monitor system development and
implementation progress.
We continue to emphasize business process reengineering for
every business system that is seen before the Defense Business
Systems Management Committee. We have greater connectivity to
the overarching information technology (IT) infrastructure that
enables the most efficient and secure execution of DOD's IT
missions.
We have also employed tighter controls on spending, that
both limit the government's liability on poor-performing
programs and also enable IT rationalization through portfolio-
based analysis. To that end, we appreciate the inclusion of
section 901 of the 2012 NDAA, enabling integrated governance
for our entire portfolio of business systems for a single
investment review board.
In summary, DOD continues to pursue and adopt a
mission-focused, outcome-driven business management culture of
continuous change and improvement.
We look forward to 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, and members of the
subcommittee, thank you for the opportunity to provide you with an
update on our efforts for improving financial operations at the
Department of Defense (DOD).
It has been approximately 8 months since our last status report to
this subcommittee. In that time, we have continued to solidify plans
and to make progress in financial management across the entire Defense
organization. The job is not yet done, and there are still major
challenges that we face, as highlighted in recent Government
Accountability Office (GAO) reports, but we are confident that we are
on the right track.
There are two critical reasons for striving to make DOD as
efficient and effective as possible. One is to ensure that America's
service men and women have everything they need to defend the United
States and its interests around the world. The other reason is to
satisfy our duty as stewards of the resources entrusted to us by the
taxpayers.
Today, DOD is able to account for the funds that are appropriated
for its use by Congress, but--unlike most other government agencies--we
cannot yet account for those funds to an auditable standard. The
explanation has much to do with the unique size and mission of DOD and
its elements. Moreover, until fairly recently, there has been neither
sustained attention nor a DOD-wide plan that could be implemented.
Today we have both and are moving forward, as you should expect. As the
people's elected representatives, you are entitled to know that DOD
strives to meet the same exacting standards for financial management as
other major government organizations.
SETTING THE FOUNDATION
Achieving this important objective at DOD is no routine task. It
requires an enterprise-wide response and an effective strategy.
Initially, DOD's approach varied by Military Service and often
concentrated on improving the kind of information that is helpful in
managing a private sector company--that is, the ``book value'' of
assets. In fact, this sort of information is of very limited value in
meeting the daily informational needs of DOD managers. As a result, in
August 2009, we revised our audit strategy to focus on the financial
information that is actually needed by Defense managers. It puts
priority on: (1) improving the quality, accuracy, and reliability of
budgetary information; and (2) confirming the numbers and locations of
assets.
This change has been endorsed by the Government Accountability
Office, among others, and it has led to improved buy-in at all levels
in the Department. Managers at DOD now see that audit readiness has
day-to-day implications for their work. To ensure the adoption of a
consistent approach to auditability, we have issued clear guidance
indicating how to assess and improve processes and controls and how to
maintain needed documentation.
As appreciation for the value of auditability has spread throughout
our organization, there is recognition that it requires an investment
in resources. Despite leaner budgets, the Department now plans to
sustain the required level of resources each year over the next 5 years
to improve business operations--providing the appropriate levels of
training, tools and support--that will allow us to achieve and sustain
auditable financial statements.
In addition, we have a governance structure in place that is
keeping the attention of senior leaders focused on business and
financial management improvement. We recognize that our governance
process needs to focus more on specific progress and must hold
individuals accountable for that progress. Each of the Defense
components is committed to specific outcomes for their respective
plans, and we are requiring the same of service providers who support
auditability. Those goals will be used to hold executives accountable
at all levels. We will continue to use outside auditors to verify
progress. Leveraging this senior leadership commitment will strengthen
our current governance process and ensure both accountability and long-
term continuity.
MAJOR ACCOMPLISHMENTS DURING THE PAST YEAR
Secretary Panetta's direct engagement on this issue has been one of
the most significant developments of the past year. In October, he
issued a directive stating that the achievement of auditable financial
statements ``is a priority for me and will be an `all hands' effort
across the Department.'' Even more important, he has made it clear that
the current lack of auditable statements is unacceptable.
Last fall--in his first appearance before the House Armed Services
Committee--Secretary Panetta also directed the Department to accelerate
the time needed to achieve audit readiness for the Statement of
Budgetary Resources for general funds so that ``by 2014 we will have
the ability to conduct a full-budget audit.'' He added, ``I've directed
the DOD Comptroller to revise the current plan within 60 days to meet
these new goals and still achieve the requirement of overall audit
readiness by 2017.''
This leadership commitment from the highest level of DOD is setting
the tone and accelerating audit readiness of the Statement of Budgetary
Resources. Plans to significantly accelerate our efforts have been
developed and are underway. Auditability is now a goal that every
commander, every manager, and every functional specialist must
understand and embrace to improve efficiency and accountability within
DOD.
Following the Secretary's lead, the Service Secretaries and Chiefs
of Staff of the Military Services have committed themselves to specific
near-term goals in support of their plans for achieving auditable
financial statements. Their commitment is mirrored in major commands.
For example, General Gary North, Commander of Pacific Air Forces
(PACAF), said it well in a memorandum to his command in March. He
wrote, ``The Air Force's ability to undergo and obtain a clean audit
opinion of our financial statements is a direct reflection of how well
we manage the entire Air Force.'' He added, ``PACAF/Financial
Management will take the lead and develop Audit Readiness Working
Groups within PACAF with the objective of developing internal and
management control programs to assist the base level functional areas
achieve audit readiness.''
In September, the Commander of Naval Air Systems included a similar
message among his Commander's Intents. Key actions include the need to
``standardize financial processes in accordance with the Navy's
Financial Improvement Program to provide accurate and auditable
information that supports program execution decisions.''
Secretary Panetta and Deputy Secretary Carter have reviewed these
and similar commitments across DOD and are holding senior leaders
accountable--both civilian and military--for progress against those
plans. In addition, Senior Executives in every area now have audit
goals in their individual performance plans and annual evaluations, and
we are working to include these goals in General and Flag Officer
performance plans as well. This helps to ensure that everyone under
their leadership will understand that better control over financial
resources has a significant effect on mission success and that everyone
has a role to play in this process.
We are working very hard to fulfill the Secretary's pledge. We are
reasonably confident that we can meet his expectations and yours.
PROVIDING NEW TOOLS AND TRAINING TO THE FIELD
The Military Departments and Defense Agencies have the lead in
reaching auditability, and they are all taking action to make that
happen. Their senior representatives are with us today, and we won't
repeat their individual messages.
We are also taking proactive steps DOD-wide. For example, we are
providing our commanders with an Audit Readiness Checklist which is
providing Defense managers with a tool akin to the operational
readiness checklists employed by military commanders. It provides
leaders with a definitive list of questions to help ensure that their
organizations have the records needed for sound resource decisions and
to make certain that the Department has the records to succeed in
coming audits. The checklist provides commanders with the basic actions
an organization should take to determine whether they are audit-ready
and to identify areas for improvement, if needed.
The checklist also helps commanders to assess the efficiency of
their organizations and to validate how well each function performs.
For example, current evidence shows widespread weakness in providing
support for our cost information. We understand that unless we can
prove the soundness of our financial decisions, funding could be at
risk. The checklist provides actions a Defense organization can use to
prove that its financial information is accurate. With each command
giving the management of money the same attention it gives to other
important assets, the Department can achieve Secretary Panetta's audit
readiness goal. Our current culture already values operational or
mission readiness. We need a similar view of our business readiness--
one that highlights efficiency and resource stewardship--in every field
organization.
Another important DOD-wide development is the progress we have made
in instituting a course-based certification program for Defense
financial management professionals. We announced our plans last year,
having in mind a certification program similar to the one in the
Defense acquisition community. Since our announcement, we have
developed a framework for the program and carried out the many steps
necessary to bring it to reality. We intend to introduce pilot versions
of the program for several components this year, with large-scale
implementation beginning next year.
We have support for the program across the Department, and Congress
has indicated its support by providing the necessary legal authority in
the National Defense Authorization Act for Fiscal Year 2012. We thank
you for this sign of approval and encouragement.
We also have made significant progress in training both financial
managers and nonfinancial managers on the importance of audit
readiness. We are reinforcing these lessons through a partnership with
private sector auditors who are experienced in financial audits. We are
using examination engagements that are an integral part of our audit
readiness methodology to familiarize DOD personnel with the
requirements for audits. These examinations are essentially small-scale
or ``mock'' audits of single business processes. The audit firms
performing these engagements employ the same procedures used in an
actual audit, but on a smaller scope and scale. These exercises provide
our employees with experience that is otherwise difficult to gain.
In addition, the DOD Financial Improvement and Audit Readiness
(FIAR) Directorate has developed a series of professional development
training courses designed to enhance Department-wide knowledge and
understanding of goals and priorities, as well as instructions to
become audit-ready and to reinforce the Department's internal control
over financial reporting requirements. In fiscal year 2011, nearly
1,000 DOD personnel received this training. Additional professional
development courses have been added since, including ``FIAR 100'' which
focuses on training DOD senior leaders, enabling them to understand the
impact of operations on financial management and audit readiness, as
well as to identify initiatives they can undertake to assist the
Department with its auditability objectives.
MAKING PROGRESS
All of these efforts have contributed to sustaining positive audit
opinions as well as breaking new ground since we last spoke with this
committee:
The Defense Information Systems Agency (DISA) achieved
a clean opinion on their $6.6 billion working capital fund
operations for fiscal year 2011, and they are moving forward
with an audit of their fiscal year 2012 general fund business.
Contract Resource Management of the Tricare Management
Activity received an unqualified opinion on its fiscal year
2011 financial statements.
The Medicare-Eligible Retiree Health Care Fund
received a qualified opinion on its fiscal year 2011 financial
statement.
In November 2011, an examination of five business
processes at the initial General Fund Enterprise Business
Systems (GFEBS) Wave 1 sites rendered a qualified opinion,
establishing a benchmark for expanding the Army's audit
readiness program.
In November 2011, a commercial audit examination
validated that the Air Force could successfully balance their
Treasury funds at the transaction level.
In January 2012, an examination validated Navy's
existence and completeness audit readiness assertion for ships
and submarines, Trident missiles, and satellites.
The U.S. Marine Corps will be the first Military Service to receive
an audit opinion on a financial statement, which will be a significant
step not only for the marines, but for the entire Department. While the
Marine Corps will not receive an opinion on the fiscal year 2011
Statement of Budgetary Resources, the significant progress made to date
has led the Department of the Navy and DOD Inspector General to agree
to move quickly to an audit of the fiscal year 2012 budget statement.
The full list of DOD entities that have received opinions and other
significant accomplishments will be published in our semi-annual FIAR
Plan Status Report. In fiscal year 2011, for example, independent
auditors issued clean opinions for Defense organizations totaling $110
billion in budgetary resources, an amount equivalent to the budgets of
nearly half of the non-Defense agencies across government. But there is
much more to be done.
BUSINESS TRANSFORMATION AND FINANCIAL MANAGEMENT
In addition to our important financial management advancements,
over the past year the Department has taken a number of steps to
improve its overarching business environment, from releasing enhanced
strategic guidance for its business operations, to furthering the
establishment of a performance culture through performance management
and improvement practices, to delivering tangible, improved business
outcomes into the hands of our warfighters in areas such as energy
efficiency, maintenance cycle time, and in-theater business
intelligence.
The Department continues to improve key enablers of its business
operations, including financial management and auditability, the
Business Enterprise Architecture (BEA) and defense business systems
environment. The Armed Services Committees have been extremely helpful
in providing the Department with tools to improve these areas. We
appreciate this opportunity to update you on our progress.
GOVERNANCE OF BUSINESS SYSTEMS INVESTMENTS
One significant development in the management of the Department's
defense business systems environment is the change to the investment
management process that Congress passed as section 901 of the National
Defense Authorization Act (NDAA) for Fiscal Year 2012. In response to
section 901, we are creating a single Investment Review Board (IRB) and
investment management process to review and certify the planning,
design, acquisition, development, deployment, operation, maintenance,
modernization, and project cost benefits of all defense business
systems that have total costs greater than $1 million across the
current Future Year Defense Program, including legacy systems. This is
in contrast to our current process that includes multiple,
functionally-oriented IRBs that review only development or
modernization investments over $1 million. While we were pleased with
the Department's fiscal year 2011 progress in eliminating 120 legacy
systems, we anticipate that the changes introduced by section 901 will
help to further accelerate the transition away from our legacy
environment. Effective governance of our defense business systems
environment is crucial to our overarching business improvement
initiatives. Because of this critical link, we can ensure there is
strong integration between our broader business governance and our
investment management process.
Implementation of section 901 is underway and is being conducted in
phases, so that we may provide for an orderly transition from our
current governance process to the new one. To accomplish the
legislative mandate, the Department created an Investment Review
Framework that requires components to create organizational execution
plans for their portfolio of investments that are aligned to functional
strategies approved by the IRB. The investment review process will
employ a structured methodology for classifying and assessing business
investments via multiple views, including:
An organizational view that promotes visibility across
business mission areas for DOD components.
A functional view that seeks to eliminate redundancy
and enhance interoperability.
An end-to-end view that enables visibility from a
process perspective across the Department's business
enterprise.
We look forward to updating you further on the implementation of
this important legislation.
BUSINESS ENTERPRISE ARCHITECTURE
The BEA, guided by the Department's strategic priorities, is an
integrated information architecture that provides guidance for the
Department's business operations and helps guide and constrain our
investments in business systems. The BEA defines the Department's
target business environment, including the necessary data standards,
business rules, processes, and performance metrics that will allow our
systems to be interoperable. Beginning with BEA 1.0 in 2003, the
Department has released improved versions of the BEA. The Department
released BEA 9.0 on March 16, 2012.
BEA 9.0 continues to refine end-to-end process definitions and
associated details for processes that support audit goals. Using this
framework of end-to-end business processes, rather than an
organizationally or functionally stove-piped approach, ensures we think
about our business in a holistic way, recognizing the connections and
dependencies each individual business area has on the others. This end-
to-end approach will also help to minimize the number of required data
exchanges and system-to-system interfaces, reducing the potential for
error and increasing process standardization, which is essential to a
clean audit.
BEA 9.0 also improves the usability of the architecture, consistent
with industry leading practices. BEA 9.0 applies open (vice
proprietary) standards and protocols to architecture development and
common business process modeling notations. This will make it easier
for the Department to ensure compliance with the BEA and
interoperability between its systems, continuing the thrust toward
enabling auditability. To implement these new approaches, DOD
components have been directed to use these specified standards, and the
end-to-end process framework, in the development of subordinate
enterprise and solution architectures that are federated or asserting
compliance with the BEA. Implementation and adoption is ongoing
throughout the Department.
BUSINESS CAPABILITY LIFECYCLE AND ACQUISITION OF DEFENSE BUSINESS
SYSTEMS
Another significant development in management of the Department's
defense business systems environment has been adoption of a new
acquisition model for defense business systems, the Business Capability
Lifecycle (BCL). BCL provides a comprehensive process that aligns
requirements, investment, and acquisition processes for defense
business systems under an integrated governance framework and focuses
on incremental delivery of capability, within 18 to 24 months of
program initiation. The BCL approach is tailored to accommodate the
unique characteristics of IT acquisition. It also ensures that we
deliver new capabilities to Department users more quickly, including
capabilities instrumental to our audit efforts. BCL's incremental
approach also maintains better control over cost, schedule, and
performance requirements.
The Under Secretary of Defense (Acquisition, Technology, and
Logistics) issued BCL policy on June 23, 2011 and the Defense
Enterprise Accounting and Management System (DEAMS) was the first
program to achieve an acquisition decision under BCL policy. Through
the use of BCL, DEAMS has integrated traditionally stove-piped
processes and enabled tight integration between the functional sponsor
and the program office.
BCL is being incorporated into the next update of the DOD 5000.02
acquisition instruction and the Defense Acquisition Guidebook. We
continue to conduct targeted outreach with Program Managers, Functional
Sponsors, and Program Executive Officers on the BCL policy, and are
working with the Defense Acquisition University to embed BCL into
appropriate curriculum. Finally, we are in the process of transitioning
several major IT programs to BCL.
BUSINESS PROCESS REENGINEERING
A fourth important development in management of our defense
business systems environment has been the introduction of new Business
Process Reengineering (BPR) requirements into the Department's IRB
process. Section 1072 of the NDAA for Fiscal Year 2010 stipulated that
investments may not be certified to obligate funds through the
Department's IRB process without having reengineered their business
processes and reduced unique requirements and system interfaces.
Conducting appropriate BPR throughout a defense business system's
acquisition or modernization lifecycle is critical to improving
requirements definition and stabilization for our acquisition programs
and the overall performance of our defense business systems. By
applying BPR early and upfront in a program's lifecycle, we can ensure
the program has clearly identified and defined the business problem the
solution is intended to solve, and that the solution appropriately
applies changes to people, process and organization, in addition to a
materiel technology solution.
The Department implemented this requirement through an assessment
process tied to the Department's IRB governance framework. As the DCMO
and Military Department CMOs conducted BPR reviews, they incorporated
lessons learned into revised and improved implementation guidance.
During fiscal year 2011, assessments were completed for all 160 IRB
certification actions. Going forward, BPR will be required in the
Department's new IRB process.
BUSINESS SYSTEMS IMPLEMENTATION
As discussed above, the Department has continued to mature Business
Transformation related processes, architectural framework, and
governance that support our transition to a more modern and disciplined
business environment. This transition is driven by a number of
activities to include the implementation of selected Military Service
or Agency Enterprise Resource Planning Systems (ERPs), modernizing
legacy systems when supported by a business case and aggressively sun-
setting legacy systems that are not aligned with our business
objectives. The implementation of these new systems is a key enabler
for executing important process and control changes as well.
Today, DOD is implementing multiple ERPs across the Military
Departments and Defense Agencies to serve as the business backbone of
their operations. Each of these implementations is at a different stage
of its lifecycle and most have experienced challenges as they have
moved from design to implementation. Broadly, we continue to improve
our oversight of these programs in a number of ways, including putting
in place more rigorous performance measures that broaden the discussion
from standard acquisition measures to key technical and business
measures. This has led to a closer link between the information
technology programs and the business outcomes that they are helping to
enable. Additionally, we are applying lessons learned across all of the
programs in the portfolio and incorporating recent GAO and DOD
Inspector General (IG) findings, which have highlighted deficiencies in
compliance, shortcomings in change management or training and
difficulties in management of data quality and interfaces that have
created inefficiencies and labor intensive rework. We acknowledge that
there have been and continue to be issues and, as GAO has noted, DOD
governance has taken appropriate action to limit the pace of
deployment. We are committed to working through every significant
deficiency in order to realize the long term value of these
investments.
In several cases there have been issues associated with ERP
compliance with basic requirements (or standards) such as the U.S.
Standard General Ledger (USSGL) and the DOD Standard Financial
Information Structure (SFIS). Each instance of non-compliance is
investigated and addressed. But many situations result from the
evolution of standards and the time it takes for those standards to
work their way into use. In short, they are matters of timing. We
understand that these basics are the key to both reporting accuracy and
interoperability and are working to develop processes to ensure that
changes are better communicated and controlled. Some SFIS and USSGL
compliance deficiencies have been identified, many have already been
corrected, and plans are in place to correct outstanding instances of
non-compliance. Despite these challenges, the more disciplined
transaction processing capability will, over time, result in improved
data quality and integrity compared to our existing legacy processes.
That is an important element of context often lacking in discussion of
problems associated with implementing our ERPs.
There is also a perception that the way DOD has implemented ERPs
creates duplication or overlapping capabilities. These investments are
reviewed with a goal of avoiding and eliminating redundancy. With the
implementation of Section 2222 of the NDAA 2012, we expect to achieve
an even more robust business IT portfolio management process. We
believe our current ERP implementations provide opportunities to
replace redundant legacy systems and represent an appropriate mix of
capabilities at the operational level where specific business
operations or missions are supported.
The Department has made notable progress over the past 2 years. A
few noteworthy examples follow:
The Marine Corps' Global Combat Support System (GCSS-
MC) is supporting USMC budgetary auditability while also
delivering tangible operational value including:
``Time to First Supply Status,'' a primary
measure for logistics responsiveness, has been reduced
from over 36 hours to an average of 10 hours.
``Order Shipment Times'' for GCSS-MC users has
been reduced by 26 percent.
``Maintenance Repair Cycle Time'' has been
reduced by 43 percent in the last 2 months from a
baseline of 40 days.
During Operation Tomodachi, the 2011
earthquake and tsunami humanitarian assistance and
disaster relief efforts in and around Japan, the GCSS-
MC system provided critical real-time in transit
visibility for high priority parts.
The Air Force's Defense Enterprise Accounting and
Management System (DEAMS) is currently fielded at Scott Air
Force Base and the Defense Finance and Accounting Service
Limestone, Maine and is delivering tangible business value:
Reduced late interest payments within the U.S.
Transportation Command from approximately $161.00 per
$1 million to approximately $7.00 per $1 million.
The Defense Logistics Agency's (DLA) EProcurement
program provides key capabilities in a single integrated
procurement process solution in support of sustainment
logistics. EProcurement recently exceeded all key performance
parameters during performance stress tests, including:
System was designed to process 8,500
solicitations per day and exceeded the threshold by
more than 90 percent during development testing.
System was also designed to evaluate 23,000
proposals per day and during development testing
exceeded the threshold by 100 percent.
DOD's modernized systems environment, including each of the
Department's ERPs provides the opportunity for improved effectiveness
and efficiency of budgeting and financial accounting operations by
providing users with standardized financial and business processes, a
single authoritative data source, and real-time posting to external
sources. In the past, we had to rely on manually-generated summary
information; we now have much more access to transaction-level data
that will help support future audits and provide leaders with
information for better business decisions. These programs and their
organizational sponsors are committed to realizing this significant
potential.
While the effective implementation of ERPs will not achieve
auditability by itself, it will help to provide the modern business
environment we need to meet and sustain the statutory requirement for
audit readiness.
CONCLUSION
Madame Chairman, we are making significant progress. While we are
mindful of the work that remains, we are reasonably confident that we
will achieve our audit goals. As we look ahead, we appreciate the
support we have received here in Congress. Your constructive criticism
and continuing oversight are helping to sustain our progress.
We also welcome your help with what has been a major problem for
financial management at DOD. We refer to the budgetary uncertainty that
we have encountered in the recent past, including no fewer than four
threats of government shutdown last year, which generated time-
consuming and unproductive planning efforts. Now the shadow of possible
sequestration is falling across our path. Dealing with these
uncertainties drains valuable time and leadership attention from
important initiatives, including our commitment to audit readiness.
Congress could help a great deal by returning to a more orderly budget
process.
Thank you again for your interest in this vital subject. We welcome
your questions.
Mr. Hale. If it is all right with you, Chairwoman
McCaskill, we will go Army, Navy, Air Force, one statement per
department, and then I assume GAO. Does that work?
Senator McCaskill. That works very well. Thank you.
STATEMENT OF HON. JOSEPH W. WESTPHAL, CHIEF MANAGEMENT OFFICER
OF THE ARMY; ACCOMPANIED BY HON. MARY SALLY MATIELLA, ASSISTANT
SECRETARY OF THE ARMY, FINANCIAL MANAGEMENT AND COMPTROLLER
Mr. Westphal. Good afternoon, Madam Chair, Ranking Member
Ayotte, members of the subcommittee. It is good to be with you
today and thank you for having this hearing.
Dr. Matiella, our Assistant Secretary for Financial
Management, and I have a joint statement together. We have
presented it for the record, and I will make a few summary
statements from it.
The first thing I want to tell you is that your Army
leadership is really engaged. I believe we have a sound plan to
achieve an auditable SBR by the end of fiscal year 2014, and
full financial statement audit readiness by the end of fiscal
year 2017.
Through DOD's FIAR efforts, the Army is connected to the
larger audit readiness community, sharing lessons learned and
best practices. Consistent with DOD's strategy, the Army
developed a financial improvement plan with specific measurable
actions and interim milestones. Our plan enables the Army to
assess progress, overcome obstacles, and incorporate
recommendations from both independent auditors and GAO. We
continue to subject it to close scrutiny. Since July 2011, we
have received two positive audit results by independent public
accounting firms. These are incremental but important steps
towards auditability. Dr. Matiella and I are confident that the
Army is on track and will achieve our goals.
In support of these efforts, the Army continues to work
with DOD's Deputy CMO, Ms. McGrath, to improve our investment
control process. Published in October 2010, the Army's business
systems architecture and transition plan provides a framework
and a road map for enabling audit readiness, optimizing
business operations, and steering our business systems
investments. Using this framework, the Army will transition our
legacy systems and prioritize our business systems investments
within a single integrated architecture.
Over a year ago, the Army chartered the Business Systems
Information Technology Executive Steering Group, a governance
forum that I personally chair, to review business policy and
serve as a key component of the Army's investment review
process. Comprised of senior Army leaders, including Dr.
Matiella, this group shaped the business systems information
technology strategy that was approved by the Secretary of the
Army in February 2011. The combination of a clearly defined
strategy and effective investment controls ensure that the Army
makes sound investments in our business systems.
More recently, the Army conducted our first five business
domain portfolio reviews covering over 700 business systems.
The reviews are not only serving to solidify the Army's
business systems architecture, but also helping to establish a
targeted environment centered on our ERPs. As the process
matures, the portfolio reviews will provide a great opportunity
to identify improvements to our business processes, streamline
our business systems, and establish a culture of continuous
improvement.
In conclusion, Dr. Matiella and I assure you that the Army
is on track to meet our auditability goals, to improve
management of our business systems investments, and establish a
solid foundation for business transformation across the Army.
On behalf of the Army, we do want to thank you, the members
of this committee, for the continued interest in this very
important matter and the unwavering support that you do give to
our soldiers and families, as you so stated.
[The joint prepared statement of Mr. Westphal and Dr.
Matiella follows:]
Joint Prepared Statement by Hon. Joseph W. Westphal and Hon. Mary Sally
Matiella
Madam Chairman McCaskill, Ranking Member Ayotte, and distinguished
members of this subcommittee, thank you for the opportunity to appear
before you today to discuss the Army's financial management and
business transformation efforts.
It is my privilege to be here along with the Under Secretary of
Defense (Comptroller) and Chief Financial Officer, the Honorable Robert
Hale; the Department's Deputy Chief Management Officer, the Honorable
Elizabeth McGrath; my colleagues from the Navy and Air Force, and the
Assistant Secretary of the Army for Financial Management and
Comptroller (ASA(FM&C)), the Honorable Mary Sally Matiella. I can
assure you that our organizations all work in close collaboration,
capturing valuable lessons learned, and sharing best business
practices. I'd like to thank them for their continued support.
The topics of today's hearing are as important to us as they are to
this subcommittee. Be assured, your Army leadership, our soldiers, and
our civilians understand the fiscal challenges confronting our country.
We are unified in our effort to make lasting improvements that will
enable us to operate more effectively and efficiently within limited
resources. As President Obama stated ``we must put our fiscal house in
order and renew our long-term economic strength.'' My colleagues and I
are all committed to being part of the solution.
FINANCIAL AUDITABILITY
Due to persistent and focused work across the entire Army, we have
a sound, resourced plan and the appropriate leadership engagement to
achieve Secretary Panetta's directive to assert auditable Statement of
Budgetary Resources (SBR) by the end of fiscal year 2014 and assert
full financial statement audit readiness by the end of fiscal year
2017. Appropriate guidance and direction from Congress, the Secretary
of Defense, and the Office of the Under Secretary of Defense
(Comptroller) (OUSD(C)) have enabled the Army to develop a focused
Financial Improvement Plan (FIP), begin demonstrating our audit
readiness and build upon our early achievements.
Through the DOD's Financial Improvement and Audit Readiness (FIAR)
efforts, the Army is connected to the larger Department of Defense
(DOD) audit readiness community, sharing lessons learned and best
practices. OUSD(C) has formulated a comprehensive strategy with a
critical path that allows the Army to focus on improving the
information most useful to decisionmakers, while moving DOD closer to
the ultimate goal of achieving and sustaining auditability. The FIAR
guidance defines a series of standardized phases that must be followed
to achieve audit readiness. The methodology focuses on the
identification and implementation of key control objectives and
supporting documents. OUSD(C) conducts quarterly updates with the
Services to maintain the focus on auditability and efficiency progress.
To achieve the FIAR objectives, the Army has allocated the
necessary resources and developed an infrastructure to perform
financial improvement activities. This infrastructure is responsible
for defining and executing the Army's Financial Improvement Plan; it
includes specific, measurable actions and interim milestones necessary
to remedy known audit readiness impediments. The Army uses these
interim milestones to assess progress and incorporate recommendations
from independent auditors, the Government Accountability Office (GAO),
the DOD Office of the Inspector General, and the Army Audit Agency. We
are specifically addressing the six auditability challenges identified
by GAO:
(1) Sustaining continuous leadership through the Secretary of
Defense directive, active engagement and directive memoranda from the
Secretary of the Army, Chief of Staff of the Army, Under Secretary of
the Army, ASA(FM&C), and the Army Audit Readiness Strategy;
(2) Building a competent workforce through the Command and
Installation Audit Readiness Guide, Army Knowledge Online Audit
Readiness Site, audit readiness training, Annual Financial Improvement
Workshop, and FIP Report quarterly newsletter;
(3) Developing a well-defined architecture that has been vetted
through our Business Systems governance process and incorporates the 15
End-to-End processes found in the Office of the Secretary of Defense
(OSD) Business Enterprise Architecture (BEA);
(4) Conducting Enterprise Resource Planning (ERP) system
auditability assessments and keeping the Office of Business
Transformation and Program Executive Officer-Enterprise Information
Systems actively engaged;
(5) Providing accountability and oversight through: Senior
Executive Service performance plan requirements; Army governance,
including quarterly In-Process Reviews, Audit Committee meetings, and
Internal Review Workgroups; and participation in OSD(C) governance
boards; and
(6) Establishing internal controls through installation-level
process and control assessments, corrective action implementation,
business process and controls training, leveraging Internal Review to
assess controls and corrective actions, instilling discipline, and
compliance with current policies.
The Army has subjected the FIP to strenuous scrutiny to hold
ourselves accountable and identify potential deficiencies. Over the
past 2 years, since the initial 2010 GAO review of GFEBS, the Army has
remediated the findings, which resulted in DOD's decision to authorize
full deployment for GFEBS in June 2011, to include, greatly improved
training; and adding the identified chart of accounts and Standard
Financial Information Structure (SFIS) compliance. The Army is
vigorously pursuing excellence in reaching the fiscal year 2014 and
fiscal year 2017 auditability goals as reflected in recent successes.
The U.S. Army Corps of Engineers is the Army's first and DOD's
largest entity to receive an unqualified audit opinion on their
financial statements and has subsequently sustained clean audit
opinions. In the General Fund Enterprise Business System (GFEBS)
environment since July 2011, we have received positive audit results by
independent public accounting firms. The first of 3 planned
examinations involved a review of over 2,500 supporting documents
resulting in the independent auditors issuing an unqualified opinion on
appropriations received and a qualified opinion on five business
processes at three sites. A second examination is scheduled for this
summer at nine GFEBS sites and DFAS. The third examination will be
conducted next fiscal year and will include all Army GFEBS sites. These
examinations are important incremental steps toward auditability. We
will continue to progress and are committed to sharing our lessons
learned with DOD and our sister Services as we proceed. We remain
confident that the Army is on track to achieve both the fiscal year
2014 SBR and the fiscal year 2017 full audit readiness goals. We
appreciate your continued support.
BUSINESS TRANSFORMATION
In October 2010, the Army published its first Business Systems
Architecture & Transition Plan (BSA&TP). The BSA&TP provides the
framework and roadmap for enabling audit readiness, optimizing business
operations, and steering our business system investments. It integrates
Enterprise Resource Planning (ERP) solutions, the Army's functional
architecture, and the DOD Business Enterprise Architecture (BEA). Using
this framework, the Army will transition over 700 legacy systems and
prioritize new business system investments within a single, integrated
architecture.
Four ERPs form the backbone for our business systems enterprise
architecture and are critical to our financial auditability goals. They
are: the General Fund Enterprise Business System (GFEBS); the Global
Combat Support System-Army (GCSS-Army); the Logistics Management
Program (LMP); and the Integrated Personnel and Pay System-Army (IPPS-
Army). Collectively they will manage the material balance of the
current and future general funds for the Army. GFEBS unifies financial
reporting and management across the Army and serves as the centerpiece
for financial auditability efforts and will be fully deployed in fiscal
year 2012. Presently, GFEBS is being used by about 45,000 of
approximate 50,000 eventual users, is 94 percent SFIS compliant and on
track to be fully SFIS compliant by the end of this fiscal year. It has
a track record of being 99.9 percent available, and at the beginning of
this fiscal year, the Army had already processed over 20 million
financial transactions using GFEBS with zero dollars in Anti-Deficiency
Act violations. To date GFEBS has distributed nearly $80 billion in
funds and obligated approximately $60 billion. The system also provides
cost and asset functionality not available in legacy systems.
LMP Increment 1 (production baseline) is fully deployed to 25,000
users at 50 sites across the Army's Materiel Command and contains the
financial ledger for the Army Working Capital Fund. Throughout the
remainder of fiscal year 2012 the ASA(FM&C) is overseeing final
enhancements to bring it within compliance with audit standards.
Following direction from the DOD Deputy Chief Management Officer, in
December 2011, LMP was converted from a service contract to an
acquisition Program of Record to provide additional oversight for
future changes to this critical enabler of national level logistics.
GCSS-A has completed Initial Operational Testing at both Fort
Irwin, CA, and Fort Bliss, TX. The Army is evaluating the results of
testing and making necessary adjustments to the system. We anticipate
receiving a full deployment decision within the next 6 months which
will ensure GCSS-A is available to support equipment accountability and
serviceability for our financial auditability goals in the future.
Lastly, in February 2012 the Army awarded a contract for the first
increment of IPPS-Army, an integrated database which consolidates
personnel information across the Active Duty, U.S. Army Reserves and
Army National Guard. Subsequent increments of IPPS-Army will streamline
personnel processes and integrate personnel pay for over 1 million
uniformed personnel across the Army. In fiscal year 2011,the Federal
Chief Information Officer completed a top-to-bottom review of the IPPS-
Army program resulting in a revised acquisition strategy which
minimizes risk to the government. While these changes extended the
lifecycle of development, the military pay integration will be fielded
in time to support our fiscal year 2017 full auditability goals.
The Army continues to work with the DOD Deputy Chief Management
Officer to define a revised investment control process as outlined in
section 901 of the National Defense Authorization Act for Fiscal Year
2012. Over a year ago, the Army chartered the Business Systems
Information Technology Executive Steering Group (BSIT-ESG), chaired by
the Under Secretary of the Army. In addition, the Army established the
2-Star and 3-Star BSIT Working Groups to provide additional levels of
collaboration on cross-functional issues. Comprised of senior Army
business leaders, these forums review business policy and serve as a
key component in reviewing and integrating the Army's investment review
process. The same leaders shaped the BSIT Strategy approved by the
Secretary of the Army in February 2011. The combination of a clearly
defined strategy and effective investment controls will ensure the Army
makes the appropriate investment in our ERPs and other business
systems.
The Chief Management Officer in collaboration with the Vice Chief
of Staff conducted portfolio reviews of our five primary business
functions: financial management; acquisition; logistics; human resource
management; and installations, energy and environment. These reviews
included scrutiny of our business systems and business architecture.
Collectively the Army has over 700 legacy business systems aligned
with these functions. The reviews were used to reinforce accountability
and emphasize a cost consciousness environment among Army leaders that
heretofore have been absorbed by fighting the war for 10 years. The
reviews will further solidify the Army's business systems architecture
and establish the target environment centered around our four ERP
systems and have facilitated retiring approximately 180 legacy business
systems incapable of meeting our enterprise management and audit
readiness objectives. This target environment will guide the investment
strategy for the future and ensure that systems are synchronized,
functionally optimized, and prioritized in support of our key business
processes. In addition, the portfolio reviews identified new
opportunities to improve our business processes, consolidate our
business systems, and establish a foundation for continuous
improvement.
Our business architecture establishes the framework for mapping and
improving the Army's end-to-end (E2E) business processes. Process
mapping provides a better understanding of how work gets done and
identifies cross-domain dependencies. It enables the Army to pinpoint
reengineering efforts, improve process efficiency, and invest wisely in
business systems. Initially, the Army is focusing on 5 of the 15 E2E
processes: Procure-to-Pay, Acquire-to-Retire, Hire-to-Retire, Deploy-
to-Redeploy/Retrograde, and Environmental Liabilities. These five
processes capture most of the Army's Title 10 mission and thus provide
the greatest opportunity for improvement.
CLOSING STATEMENT
On behalf of the Army, thank you for your continued interest in
this very important matter and for your unwavering support in all you
do for our soldiers and their families. While the Army continues to
support the ongoing war in Afghanistan, we are shaping our force
structure and developing resourcing strategies to meet the new defense
strategy. Fielding ERPs across the entire Army, we are able to leverage
leadership at many levels to achieve our fiscal year 2014 and fiscal
year 2017 auditability goals.
Through an adaptive approach, thousands of military and civilian
professionals are fielding these systems, achieving front line
progress, and establishing a solid foundation for continuing business
transformation across the Army. With the support of this committee, the
Office of Management and Budget, OSD, and Army leaders throughout the
force, I am confident that the Army is on a positive path to meet our
goals. Thank you.
STATEMENT OF HON. ROBERT O. WORK, CHIEF MANAGEMENT OFFICER OF
THE NAVY; ACCOMPANIED BY HON. GLADYS J. COMMONS, ASSISTANT
SECRETARY OF THE NAVY, FINANCIAL MANAGEMENT AND COMPTROLLER
Mr. Work. Madam Chairman, Ranking Member Ayotte, thank you
for this opportunity to discuss the Department of the Navy's
progress towards achieving financial auditability and business
process reform and the important role that the Navy ERP will
play in these efforts.
I, like my colleagues, have submitted a joint statement
with Ms. Commons for the record, and I would just like to make
a couple of key points before answering your questions.
Ms. Commons and I, as well as the Secretary of the Navy,
the Commandant of the Marine Corps, and the Chief of Naval
Operations (CNO), are all committed to DOD's plan to achieve
audit readiness. At every chance I get, I personally stress the
importance of this goal with our leaders, managers, and
employees at every single opportunity, and I believe the
Secretary, the Commandant, and the CNO do as well. As Secretary
Hale has said, setting a clear tone from the top and engaging
the entire Navy in audit readiness is very essential.
We have developed a very detailed, Navy-wide plan. We are
now working with each of our major commands and our service
providers to ensure that they understand their specific role in
achieving this very important goal. Based on some very
important foundational work by our predecessors, the tone from
the top, and this plan, particularly the trailblazing efforts
of the Marine Corps, I believe the Navy is very well-positioned
to achieve Secretary Panetta's goal of an audit-ready SBR by
fiscal year 2014, as well as being fully audit-ready by 2017.
Our major IT systems, we think, are well-aligned with this
effort. All three of our major current efforts are on strong
footing. The Navy ERP is on schedule to complete its program of
record in fiscal year 2013. We have 66,000 users now worldwide.
We will have 71,000 by the end of fiscal year 2013. That will
manage about 47 percent of our total obligational authority. 27
systems have been retired to date as a result of this
deployment. We are on schedule to reduce another 55 systems
this fiscal year, for a total of 82, and we expect a total of
96 systems to be shut down by fiscal year 2016.
Additionally, we have a comprehensive effort to standardize
execution of business processes among our Navy ERP users.
Reducing the process variations, as you mentioned in your
statement, ma'am, when using the system along with standard
operating procedures that will be followed by all, will achieve
the greatest benefits across the Navy. Paring down the number
of steps to complete Navy ERP transactions will make this
system more efficient and easier to use, and by permitting
fewer variations in the processes, we will reduce systems
maintenance costs. Finally, consistent, streamlined procedures
will require less future work in sustaining our control
environment, which is very important.
We are in the process of developing data standards across
the enterprise that will allow us to aggregate information from
all of our ERP systems with those systems that we decide to
maintain.
The Marine Corps GCSS is deployed. It will eliminate four
major legacy systems by the end of fiscal year 2013. In fact, I
am very pleased to report that since 2008, we have reduced more
than 1,400 systems and applications and we have shut down 400
networks.
The Navy's Future Personnel and Pay Solution (FPPS) has
been refocused. I ordered an assessment of this effort in late
2010, and as a result of this assessment, we have determined
that instead of initiating a large-scale business systems
acquisition, we will instead focus on process improvement and
leveraging this investment with the existing Navy Standard
Integrated Personnel System. The Navy reached this conclusion
after an exhaustive review of its policies, practices, and
processes, and I believe this is a case of business process
engineering done right. Instead of building the system to
automate how we used to do business or do business today, the
functional community is first rethinking what it wants to do in
the future, and only then will we look to IT solutions to
support the new and improved way of service delivery. We think
this approach has reduced the original estimated cost by at
least $167 million and eliminated at least $157 million in
additional cost growth from fiscal year 2010 through 2017.
I think this example points to one of the keys to both
auditability and the successful launch of IT systems. As you
mentioned, ma'am, reengineering of our business processes is
the key. Our business process reform approach is now mature to
the point where we address the full spectrum of business
operations by focusing on three things: strategic management,
understanding the costs of doing business, and managing the
organization toward achieving better and more measurable
results.
Our methodology requires baselining and mapping business
processes, allowing the business owners to identify and
prioritize their problems and then exploiting opportunities for
improvement.
A second key is data standardization, and a third is having
good internal controls.
We are focused on all three of these things. Auditable
financial statements will be the outcome of these efforts.
So the Navy, I believe, has an aggressive, forward-leaning
plan to take control of how we do business, to standardize
data, and ultimately achieve financial audit readiness, a plan
which has yielded initial successes. We have had two favorable
opinions on appropriations received and on the existence and
completeness of our submarine, ship, missile, and satellite
inventories. We have not received formal word, but we have been
told that our aircraft inventories are also ready. So we
continue to make progress, and I am relatively confident that
we will meet all of the deadlines.
I would like to echo Under Secretary Westphal's
appreciation for this subcommittee's focus on this effort, and
we look forward to continuing to work with you and your staff.
I am very much looking forward to any questions you might have.
[The joint prepared statement of Mr. Work and Ms. Commons
follows:]
Joint Prepared Statement by Hon. Robert O. Work and
Hon. Gladys J. Commons
Chairman McCaskill, Senator Ayotte, thank you for this opportunity
to discuss the Department of the Navy's (DON) progress toward achieving
financial auditability, business process reform and the important role
Navy Enterprise Resource Planning (ERP) will play in these efforts. To
maximize the use of our human and fiscal resources; prevent fraud,
waste and abuse; and provide the warfighter the best capabilities to
achieve the Nation's security strategy, it is essential that the
financial data we rely on for decisionmaking is accurate and reliable.
I am committed to the Department's aggressive plan to achieve audit
readiness and stress the importance of this goal with our leaders,
managers, and employees at every opportunity. Setting a clear ``tone
from the top'' and engaging the entire Department in audit readiness is
essential for success in this complex undertaking.
To achieve audit readiness, we have focused our efforts on
improving our business processes end-to-end; modifying our systems to
meet Federal Information System Controls Audit Manual standards; and
strengthening internal controls surrounding those business processes
and systems. Our business process reform approach has matured into
addressing the full spectrum of business operations: focusing on
strategic management, understanding the costs of doing business, and
managing the organization towards achieving better and more measurable
results. Our methodology requires baselining and mapping business
processes, allowing the business owners to identify and prioritize
problems, and then exploiting opportunities for improvement. Auditable
financial statements will be the outcome of our business transformation
efforts.
We have developed a detailed Department-wide plan and worked with
each major command and our service providers to ensure they understand
their role in our success. Based
on our comprehensive plan and our ongoing efforts, we are well-
positioned to achieve Secretary of Defense Panetta's goal of an audit
ready Statement of Budgetary Resources (SBR) by the end of fiscal year
2014, as well as reaching the fiscal year 2017 date established by the
National Defense Authorization Act for Fiscal Year 2010 for full
auditability.
The Department is making steady progress on its financial
auditability plan. The audit of the Marine Corps' SBR continues. Our
goal was to achieve a favorable audit opinion on the fiscal year 2011
SBR audit. We extended the audit 3 months because an opinion appeared
to be within our grasp, but the need for additional test sampling, plus
time limitations, forced the conclusion of this second-year effort
without an opinion. However, noting the significant progress made, both
the DON and the Department of Defense Inspector General agreed, that we
should now move quickly into an audit of the Marine Corps' fiscal year
2012 SBR.
The Marine Corps' experience has been valuable to the rest of DON
and to the other military departments as we all seek to achieve SBR
audit readiness. The Marine Corps has developed essential financial
management capabilities for the first time, such as reconciling cash
with the Treasury's balance; and they constructed a robust, effective
audit response infrastructure, enabling the rapid collection and
transmission of large volumes of business process documentation to
auditors for analysis.
Additionally, the Marine Corps is executing an aggressive
corrective action plan for business process and system deficiencies
identified during its audit readiness preparations and during the
annual audits. This sustained progress in improving Marine Corps
business operations, set in motion by the pursuit of auditability, has
produced instructive lessons for DON and the other Services.
The Department of the Navy has achieved other notable audit
readiness accomplishments. In late summer 2011, we achieved a favorable
audit opinion on the Department's Appropriations Received process.
Validation by an independent accounting firm confirms that the process
and systems we use to allocate the resources provided by Congress are
auditable. In January 2012, the Department of Defense Inspector General
completed an examination and verified that the processes and systems we
use to establish Existence and Completeness of ships, submarines,
Trident missiles, and satellites inventories are audit ready. A similar
examination of DON's aircraft inventory management is currently
ongoing.
A second examination is also underway, focusing on the E-2D Hawkeye
aircraft acquisition program. This examination will determine whether
the business processes and systems used to manage this major
acquisition program meet audit standards. This examination has added
importance because the E2-D program is executed within Navy ERP; the
results will reflect the effectiveness of the controls in the Navy's
``target'' financial system.
Though the Department is making steady progress toward financial
auditability, much remains to be done. Completing our ambitious SBR
audit readiness schedule requires a number of business process
assertions this fiscal year and next. We also need to assess the
effectiveness of our major business systems' controls. Following the
Marine Corps' example, the entire Department needs to fully develop the
same fundamental financial management capabilities required for an
audit, including detailed cash reconciliation; and, an effective audit
response infrastructure needs to be in place. These complex efforts
will test the Department's acumen, as well as the skills of our major
service provider, the Defense Finance and Accounting Service.
Navy ERP, which accounts for over half of the Navy's obligational
authority, is an essential component of auditability. The Navy's
planned implementation of ERP at six major commands, which began in
fiscal year 2008, will conclude next fiscal year. Concurrently, we are
focusing on two other major objectives: assessing Navy ERP's present
ability to meet financial audit standards prescribed for a business
system; and making improvements in its utility. A methodical effort is
underway to standardize the execution of business processes within Navy
ERP across our diverse user population.
This year, an independent assessment will be conducted, determining
if Navy ERP's internal controls comply with the Government
Accountability Office's financial systems audit standards. Completing
this survey, and quickly pursuing any follow-up remediation required,
will be important steps toward Departmental audit readiness. We are
optimistic that the assessment will demonstrate that Navy ERP has
effective controls overall. Our E2-D audit readiness assertion,
mentioned earlier, showed positive results in the Navy ERP environment.
Additionally, our comprehensive effort to standardize execution of
business processes among Navy ERP users is fully underway. Reducing
process variations when using the system, along with establishing
standard operating procedures to be followed by all, will yield
benefits. Paring down the number of steps to complete Navy ERP
transactions will make the system more efficient and easier to use.
Permitting fewer variations in ERP business processes will reduce
system maintenance costs. Finally, consistent, streamlined procedures
will require less future work in sustaining Navy ERP's control
environment.
In conclusion, DON has an aggressive, forward-leaning plan to
achieve financial audit readiness--a plan which has yielded initial
successes, but one which will require much more hard work and
creativity throughout the entire Department to complete. Thank you for
your continued support, and I would be pleased to answer your questions
at the appropriate time.
STATEMENT OF HON. JAMIE M. MORIN, ASSISTANT SECRETARY OF THE
AIR FORCE, FINANCIAL MANAGEMENT AND COMPTROLLER; ACCOMPANIED BY
DAVID TILLOTSON III, DEPUTY CHIEF MANAGEMENT OFFICER OF THE AIR
FORCE
Dr. Morin. Madam Chair, thank you again for the opportunity
to join my colleagues from across DOD and our valued partner
from GAO, Mr. Khan, for today's hearing to discuss DOD and your
Air Force's efforts to achieve audit readiness.
As you mentioned, unfortunately, our Under Secretary and
CMO, Ms. Conaton, is recovering from an injury today. So you
have me and her Deputy CMO, Mr. Dave Tillotson, here and we
will seek to provide a short statement and then answer any
questions that you have.
Since the Air Force leadership testified to this
subcommittee back in July of last year about audit readiness,
we have made continued progress towards that goal--particularly
since the Secretary laid out his accelerated deadline of 2014.
We remain very strongly committed to achieving that accelerated
goal for the SBR, as well as the broader legislative
requirements for a clean audit by 2017. We are leaning forward
aggressively on this.
The goals are challenging for an organization as large and
diverse and geographically distributed as the Air Force, so we
do continue to assess, as I have testified before, that there
is moderate risk in meeting that deadline, primarily due to
systems challenges. As was stated earlier, our effort now
focuses on achieving audit readiness within our legacy systems
which is an effort that we are working aggressively on but
remains an uncertain piece of our effort.
We are working to mitigate that risk very directly through,
first of all, strong engagement of Air Force leadership at all
levels, as well as highly focused investments of additional
human and financial resources towards this effort. We have made
great progress over the last year.
Speaking of leadership engagement, Secretary Panetta's
directive to accelerate to 2014 has been both a blessing and a
challenge for the Air Force. The core challenge is, of course,
that the accelerated deadline means that we cannot rely on all
of those ERPs that we had depended upon in our previous plan.
That is a real challenge. Waiting for those multiple critical
systems to be deployed and fully used is no longer going to
work, so we have a shift in strategy, that is clear.
But the blessing is that the Secretary's engagement,
coupled with the consistent and strong guidance--from this
committee and other committees--in law, and in hearing after
hearing over the last couple of years, have really helped to
build a degree of consensus on the importance of this effort
and a degree of leadership commitment that is showing real
dividends. Audit readiness has become a regular agenda item for
the four-star leadership of the Air Force, involving both
civilian and military leaders in a way that I think could not
have been anticipated or imagined without the leadership from
this committee and the Secretary.
I think this top-level leadership is driving increased
involvement from military commanders at all levels down to the
field. There is still work to be done in that regard, but it is
catching on quite aggressively. It also enables our very strong
focus on personal accountability, and that is something that is
playing out in financial incentives for our civilian senior
executives, where the performance plans for about 140 civilian
senior executives are directly tied to delivery on audit
readiness goals. It is playing out in military evaluations as
well, albeit to a somewhat lesser extent.
It also contributes to the very strong support we have
received in the DOD internal resource allocation process for
some of the key areas where we needed investments. I think of
those investments, and we as an Air Force leadership think of
those investments, in terms of three components: people,
processes to include internal controls, and systems. So all
three are working together.
We are certainly encouraged with some of the interim
successes we have had in meeting the accelerated deadline,
particularly the fact that we received two clean opinions in
the last year, on our Fund Balance with Treasury (FBWT)
reconciliation and on our funds distribution process down to
our major command level. We also, like some of the other
Services, have an examination currently underway looking at our
military equipment. The DOD IG is performing that right now,
and indications so far are quite good. That is our aircraft,
our intercontinental ballistic missiles, our satellites, et
cetera.
But we clearly still have a very aggressive schedule ahead
of us, and it will touch those people, processes, and systems
pieces.
Our most immediate challenge right in front of us is
people. We need to continue to hire, whether through government
civilian hiring or through contractor hiring, people with the
requisite skills, government personnel and contractors with the
knowledge and experience in accounting, auditing, and financial
reporting that will help us get across the finish line here.
This is a challenge because, again, the scale of DOD makes
finding enough people with enough skills a challenge.
But we also need to continue to invest in the people, and
that is why we strongly endorse Under Secretary Hale's
leadership on this financial management workforce certification
initiative. We think that is critical.
Our process redesign and internal control efforts and those
improvement efforts have become certainly all the more
important with the accelerated deadline, and we have been
working them aggressively. But I wanted to shift to just a very
brief discussion of our ERP system investments because that is,
obviously, a key focus of this subcommittee.
Financial systems modernization is clearly a key enabler
for both achieving and sustaining full audit readiness by 2017
in a cost-effective manner to avoid that army of auditors that
you discussed in your opening statement, ma'am.
The Air Force recognizes, though, there are major
challenges involved in fielding ERP systems in a big
organization like ours, and we have taken and will take
appropriate action to address concerns identified through best
practice reviews and audits both from internal and external
sources. We very much appreciate the active support we are
getting from the Office of the Secretary of Defense (OSD), from
the Air Force Audit Agency, from the DOD IG, and of course,
from GAO.
In the case of the Defense Enterprise Accounting and
Management System (DEAMS), our core financial system for the
general fund and transportation and working capital fund, we
have learned some very key lessons from the other ERP
deployments, and that have led us to focus on things like end-
of-year financial activities and focus on user training and
education and especially on user experience issues associated
with system stability. We are measuring our success against
those goals on a weekly basis. DEAMS has now been deployed at
Scott Air Force Base and we have gone through 2 years worth of
budget closeout in that system. We received milestone B
authority for that system back in January and we are about to
kick off an operational assessment with the Air Force
operational evaluation team looking at the actual
implementation of the system. We will take any lessons that
come out of that and we will expect to deploy the system at
five other bases over the next fiscal year.
As the subcommittee is aware, another major Air Force ERP,
our Expeditionary Combat Support System (ECSS), has not fared
as well. The program is currently going through a major
restructuring effort. We are now approaching 7 years since
funds were first expended for this system, which was designed
to restructure our logistics processes and field a massive ERP.
The total cost on the system is now over $1 billion. I am
personally appalled at the limited capabilities that program
has produced relative to that amount of investment. The rest of
the senior Air Force leadership feels that way as well. That is
why we are restructuring, looking for an alternative path. The
restructuring effort is ongoing right now, but the subcommittee
and Congress should expect to see a way forward identified in
the next month or so. We owe you a clear and concise
description of a much better way forward for our logistics
modernization and financial improvement.
Let me just conclude by saying that while we certainly do
see moderate risk in that 2014 deadline, we are leaning
aggressively to achieve it and we are strongly committed to
that 2014 SBR audit goal, as well as the ultimate goal of full
accountability by 2017. This is a key part of the Air Force's
effort to squeeze the maximum amount of combat capability out
of each taxpayer dollar that this Congress and this Nation
entrusts to us. We take it seriously and we will continue to do
so.
Thank you again for your engagement and support.
[The joint prepared statement of Ms. Conaton and Dr. Morin
follows:]
Joint Prepared Statement by Hon. Erin C. Conaton and Hon. Jamie M.
Morin
Madame Chairman and Senator Ayotte, thank you for the opportunity
to join our colleagues from across the Department of Defense to discuss
your Air Force's efforts towards achieving audit readiness. Since the
Air Force leadership last testified to this subcommittee on audit
readiness last July, the Air Force has continued to make progress
towards our audit goals and remains committed to achieving Secretary
Panetta's goal for audit readiness on the General Fund Statement of
Budgetary Resources in 2014 as well as to meeting the legislative
requirements for a clean audit by 2017. These goals are challenging for
an organization as large and diverse as the Air Force and so we
continue to assess that there is moderate risk that we will miss the
deadline due primarily to system challenges. However, the strong
engagement of Air Force leadership as well as the additional human and
financial resources dedicated to the effort in recent years will help
achieve a clean audit, and we are making real progress.
Audit readiness is an important goal. Our efforts are part of the
broader work underway in the Department to address the national fiscal
challenges that pose a serious threat to our national security. They
are a key component of our ongoing work to give the American taxpayer
confidence that we are getting the maximum value out of each dollar
entrusted to the Air Force.
Secretary Panetta's directive accelerating the audit readiness date
to 2014 has been both a blessing and a challenge. The blessing is that
it has raised the visibility of audit readiness to the point where it
has been a regular agenda item for our 4-star leadership and created an
environment where success is achievable within the tenure of many of
these current leaders. To implement Secretary Panetta's directive, the
Air Force developed a detailed audit acceleration plan for each
assessable unit. These plans include specific milestones and
deliverables and are reviewed on a regular cycle in sessions held
weekly by the Deputy Chief Management Officer, financial leaders, and
the senior leadership responsible for the particular assessable unit.
Our assertion teams also include members of the Office of the Secretary
of Defense (OSD) (Comptroller) staff in order to provide us with
valuable, real-time feedback on our effort and to minimize the need for
additional testing or rework.
The core challenge for the Air Force is that the accelerated
deadline will require us to achieve and sustain audit readiness while
multiple critical systems are still under development or being
deployed. Our previous strategy had these systems as a pacing item. We
will not have a final judgment on whether our legacy financial systems
can be improved sufficiently to support an overall Air Force audit
until the auditors can examine those systems in the field. Our emerging
confidence in our ability to achieve this challenging deadline is
partially due to the increased engagement of commanders at every level
in the effort, along with demonstrated progress over the last 2 years
and strong support in the Department of Defense (DOD) resource
allocation process for targeted investments in improvements to the
three critical components for an auditable enterprise: people,
processes, and system.
CURRENT PROGRESS
Since the subcommittee's last hearing, the Air Force has made
substantial progress on key Financial Improvement and Audit Readiness
plan deliverables. Last August, we received a clean opinion from KPMG
LLP on our Budget Authority assertion recording the receipt of funds
down to our Major Commands. In the process of preparing the assertion,
Air Force financial managers identified and implemented several
corrective actions, most notably a standard document numbering systems
for loading budget authority into our financial execution system,
allowing us to assert audit readiness for the entire process.
Another key accomplishment occurred last October when we received a
clean opinion from PriceWaterhouseCoopers (PWC) on our Fund Balance
with Treasury Reconciliation process. Our reconciliation with the
Treasury Department for our ``checkbook'' consists of over one million
transactions and is conducted on a monthly basis. The Air Force and the
Defense Finance and Accounting Service (DFAS) are sustaining this
process, reconciling 99.85 percent of our transactions at the detail
level, exceeding the Office of Management and Budget standard.
In January, the Department of Defense (DOD) Inspector General (IG)
began an examination of our existence and completeness assertion for
our military equipment (e.g., aircraft, ICBMs, and satellites), as well
as for cruise missiles and aerial targets. We anticipate receiving
their opinion by the end of May. These assets have a combined net book
value of approximately $90 billion. Although cruise missiles and aerial
targets/drones are separately reported as Operating Materials and
Supplies rather than military equipment, we saw an opportunity to
accelerate our overall progress and save resources by asking DOD IG to
include these items in their examination. We will continue to look for
additional opportunities to accelerate progress on future assertions in
a cost effective manner.
We also recently submitted assertions of audit readiness for the
existence and completeness of our uninstalled spare engines and missile
motors. These have a combined net book value of approximately $11
billion and include over 6,400 individual end items managed at over 160
different sites. Properly reporting these items in our financial
statements is challenging. Items are tracked in different systems and
classified differently depending on their installation status. It is
common for an item to transition from one system to another and
alternatively be reported differently in successive statements. Getting
sufficient confidence about these areas for Air Force management to
assert our readiness for audit required more time than we originally
projected and demanded changes in training of our people, in our
business processes, and our systems, but we now believe the required
corrective actions are properly implemented or well underway.
INVESTING IN PEOPLE
We are encouraged with our interim success in meeting the
accelerated deadline, but we still have a very aggressive schedule
ahead of us. Our most immediate challenge is on the people side:
finding, hiring, and deploying government personnel and contractors
with the needed knowledge and experience in accounting, auditing and
financial reporting for the Federal Government. The compressed schedule
also reduces the time we have to document processes, conduct testing,
implement corrective actions, and verify those corrective actions are
operating as intended. Additionally, many of our major milestones such
as assertions on military pay, civilian pay, and contracting have been
moved up by 2 or more years, making the need for experienced
individuals even more urgent. Finally, compounding this challenge is
the fact that the other Services and Defense Agencies will likely be
seeking out these same individuals. We are addressing this challenge by
reaching out to the accounting industry and soliciting an experienced
but cost effective partner to support our core team of government
financial managers and functional experts.
To broaden the audit readiness effort across the enterprise, and
building on an effort the Air Force pioneered last year, this year we
required all Air Force civilian senior executives to include an audit
readiness goal in their annual performance plans. While the weighting
and level of detail in these goals vary based on individuals' duties,
each plan is reviewed by the Deputy Assistant Secretary for Financial
Operations to confirm the goals are appropriate and contribute to audit
readiness in a meaningful way. Since pay and performance evaluations
are linked directly to accomplishment of these plans, we have high
expectations. For example, many of our logisticians have goals
supporting our existence and completeness assertions, while acquisition
executives have goals requiring them to ensure data in our contracting
and accounting systems is properly reconciled.
Since achievement of audit readiness will require further
professionalization of the financial management workforce, the Air
Force strongly supports the Defense Department's efforts on a financial
management workforce certification program. This program will
standardize educational and experience requirements for financial
management positions. Even ahead of this effort, the Air Force's
financial management workforce is a well-educated one. Over 60 percent
of Air Force financial managers hold a degree of some sort.
Additionally, our primary audit readiness workforce of almost 80
includes 12 CPAs, 15 Certified Defense Financial Managers, and 8
Certified Government Financial Managers.
STRENGTHENING AND STANDARDIZING BUSINESS PROCESSES
In addition to mobilizing our people and investing in their skills,
improvements in our business processes are key to meeting the
accelerated deadline of 2014. While some audit challenges require
systems enhancements, others can be overcome with enhanced policies.
For example, our two most recent assertions for existence and
completeness of critical assets relied primarily upon policy changes
clarifying the need for periodic inventories and delineating
responsibility for managing assets as they transition among Air Force
and contractor facilities.
To achieve compliance with improved and standardized processes, we
are aggressively communicating with airmen across the Air Force from
our major command commanders down to the lowest level about the meaning
of audit readiness and the actions they can take to assist in achieving
audit readiness. We recently provided our wing commanders with a
checklist to help them understand the steps they can take to ensure
their financial house is in order.
We continue to collaborate with our sister services to adopt best
practices as we work towards audit readiness. For example, we leveraged
the Navy's audit of supporting documentation and controls as a way to
expose airmen to our audit activities and ensure process compliance at
base level. Since February, the Air Force Audit Agency has begun
examinations of selected financial transactions at wing level with
seven wings participating. This effort helps to identify good and bad
practices as well as process improvements that will be required when
financial auditors begin their engagements. It also helps educate our
wing commanders on audit readiness.
The Air Force has sought validation of our progress by independent
accounting organizations including the Government Accountability Office
(GAO), the DOD IG, and public accounting firms. They provide valuable
insight into the adequacy of the existing systems, recommend
enhancements to support audit readiness and provide objective
recommendations on the assertion process. For example, last summer GAO
identified weaknesses in the type of testing performed to support the
aircraft in our Military Equipment assertion. Specifically, they raised
a concern that the sampling was limited to a few bases along the east
coast--what auditors call judgmental sampling.
For our recent assertions on spare engines and missile motors, we
applied more rigorous statistical analysis allowing us to quantify
potential errors across the population of items. In the case of our
missile motors, we found that business practices, like timely updating
of inventory systems, were very good at the locations where the vast
majority of our motors were stored, but were less consistent at places
that might have just one or two motors for training purposes.
Statistical analysis has not only enhanced the credibility of our
results but in the case of our review of the Space-Based Infrared
Satellite Network program allowed us to test 148 randomly selected
transactions in order to evaluate the accuracy of a total population of
over 12,000 transactions.
business transformation and enterprise resource planning systems
Air Force business transformation is anchored in architecture and
associated business process re-engineering. The continued development
of the business enterprise architecture allows the Air Force to
identify gaps and redundancies that will focus critical resources in
the proper areas. Consistent with this focus, in the fiscal year 2013
budget submission the Air Force established an initiative to target
$1.1 billion in savings by reviewing Air Force information technology
applications to identify and eliminate duplicate/redundant business and
operational system capabilities. In addition, we are minimizing
configuration of commercial off-the-shelf software to handle unique
requirements and interfaces, thus reducing life cycle costs. Consistent
with recent statute, the Air Force is adjusting its current business
system certification review process. The revision will expand business
system certification reviews from an average of 40 systems per year
over the past 5 years to more than 200 systems that will need to be
certified for fiscal year 2013. Finally, the Air Force is using
architecture and business process re-engineering to evaluate and
document the control processes required to support audit readiness,
providing the necessary glue between user actions and controls
contained within financial systems.
Enterprise Resource Planning Systems (ERPs) are a key enabler to
achieving full audit readiness by 2017 in a cost effective manner, but
they are not the only step on the path to audit readiness. The
implementation of ERPs supports achieving Air Force-wide standard
practices and instills process controls necessary to improve financial
management discipline. Where ERP development schedules will not support
the audit readiness timelines, the Air Force will use a combination of
modified legacy systems and supporting business process controls.
Specific process and information system gaps (whether satisfied by ERPs
or legacy system remediation) will be guided by Air Force Business
Enterprise Architectures.
The Air Force's three key ERPs for audit readiness are: Defense
Enterprise Accounting and Management System (DEAMS), Expeditionary
Combat Support System (ECSS), and Air Force Integrated Personnel and
Pay System (Air Force-IPPS). DEAMS and ECSS are programs that have been
underway for several years, and Air Force-IPPS is the Air Force program
that will satisfy Air Force Total Force military personnel management.
The Defense Enterprise Accounting and Management System is jointly
sponsored by the Air Force, U.S. Transportation Command (TRANSCOM), and
the Defense Finance and Accounting Service. The program will provide
accurate, reliable, and timely financial information using standardized
business rules and processes that comply with existing laws,
regulations, and policies. When fully operational, DEAMS is expected to
maintain control and accountability of about $160 billion in Air Force
general funds and the Transportation Working Capital Fund. DEAMS will
eventually replace or subsume nine legacy systems as it becomes fully
operational and will provide the Air Force with financial management
capabilities, including collections, commitments and obligations, cost
accounting, general ledger, funds control, receipt and acceptance,
accounts payable and disbursement, billing, and financial reporting for
the general fund.
The Defense Enterprise Accounting and Management System has been
used at Scott Air Force Base and DFAS Limestone since 2010, and has
been successfully used to process over $11.5 billion in transactions
during fiscal years 2010 and 2011. Moving forward, our current program
plan calls for completion of maturation of the current operational
baseline by April 2012, followed by an operational assessment and then
deployment of that capability to five additional Air Force bases by
June 2013. We expect to complete development and deployment of DEAMS
across TRANSCOM by the end of fiscal year 2014 and across the
operational Air Force, Air Force Materiel Command (AFMC) and Air Force
Space Command by the end of fiscal year 2016. DEAMS will not only be
critical to sustaining audit readiness, but also have real cost
benefit. The Air Force expects that DEAMS will support a more than $300
million annual savings once it is fully deployed by providing real-time
visibility into costs and allowing timely reallocation of dollars while
reducing unliquidated obligations and accounts receivable. The program
successfully achieved a Milestone B decision in January 2012, and the
program is now aligned with the streamlined acquisition policies for
Business/IT system put forward by the DOD.
The Expeditionary Combat Support System is intended to provide the
Air Force with a single, integrated logistics system, including
transportation, supply, maintenance and repair, engineering and
acquisition, for both the working capital and general funds. It will
streamline the supply chain management process in the Air Force.
Unfortunately, program performance on ECSS has continued to be poor. As
a result, the Air Force raised concerns to the DOD Milestone Decision
Authority and the Department is now engaged in strategic reassessment
of the overall program. The reassessment will maintain focus on
addressing both audit readiness and achievement of genuine logistics
return on investment. A joint OSD-Air Force team recommended
restructuring ECSS to focus on four critical logistics capabilities.
The Air Force is currently drafting a Critical Change Report based on
these recommendations to formally notify Congress of the restructure
plan and expects delivery of that report by May 2012.
The Air Force recognizes the major challenges involved in ERP
efforts. In working with OSD and GAO, the Air Force has taken
appropriate action to address concerns identified through internal and
external reviews of both programs. In the case of DEAMS, we focused on
end of year activities and user stability issues, measuring our
progress against those efforts weekly. Our efforts resulted in
achieving Milestone B authority in January 2012. We are actively
working network latency issues and the program is on track to deliver a
much needed capability. ECSS has not fared as well; the Air Force is
restructuring the program in accordance with the OSD-led assessment and
entered the Critical Change Report process February 2012 with an
estimated delivery of the report 60 days later.
The Air Force Integrated Personnel and Pay System (Air Force-IPPS)
will integrate 105 Personnel and Pay processes, including the core
personnel actions that drive payroll management, for the more than
500,000 Active Duty, Reserve, and Guard members of the Air Force. Air
Force-IPPS will directly enable synchronization of data, improve
personnel asset visibility for combatant commanders, reduce payroll
errors, and streamline clean audit compliance. It was initiated in
fiscal year 2009 and is planned for full operational capability by
October 2016. Air Force-IPPS is expected to replace 22 legacy
information technology platforms reducing current annual system total
cost of ownership from $110 million to $65 million. Air Force-IPPS will
replace the Air Force's pay operations currently conducted on the
Defense Joint Military Pay System and will reduce today's 85,000 annual
pay cases requiring manual processing by 75 percent and improve payroll
timeliness from 93 percent to 97 percent. The Air Force is currently
planning to release the Request for Proposal May 2012.
We are building on internal Air Force and independent audits by
advancing our major IT efforts to deliver capabilities in more
manageable steps. This is done within our broader efforts to adjust our
IT modernization and sustainment spending reviews and certifications.
As we review and certify our IT systems to comply with section 2222 of
title 10, audit readiness is a key evaluation factor for both
modernization and sustainment of financial and financial feeder
systems.
We recognize the challenges in front of us. We have put into action
people, process, and system changes to achieve audit readiness and
improve management discipline in our financial business processes. We
have developed and achieved key interim milestones and continue to
develop business systems acquisition and engineering strategies in
accordance with relevant laws. While we certainly see moderate risk and
many challenges ahead, we are strongly committed to achieving the 2014
Statement of Budgetary Resources audit goal and the ultimate goal of
full auditability by 2017. We appreciate this subcommittee's interest
and advice in our audit readiness efforts and look forward to
continuing to work with you in achieving auditable financial statements
for the U.S. Air Force.
Senator McCaskill. Mr. Khan?
STATEMENT OF ASIF A. KHAN, DIRECTOR, FINANCIAL MANAGEMENT AND
ASSURANCE, GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Khan. Good afternoon, Chairman McCaskill. I am here
today to discuss the status of financial management
improvements and business transformation in DOD.
At the outset, I would like to thank the subcommittee for
holding this hearing and acknowledge the importance of focusing
attention on actions needed to meet difficult challenges.
Effective financial management and reporting are important
for DOD decisionmakers and their accountability for their
stewardship of Federal funds. Financial management is integral
to other DOD business operations such as acquisition,
logistics, and supply chain management, that provide crucial
support to the DOD mission and it depends on business
information systems to store, compile, process, and report
reliable and auditable data.
In my testimony today, I will provide GAO's perspectives on
the financial management weaknesses that impede DOD's progress
towards auditability and efforts to resolve them and the
difficulties DOD is experiencing in implementing business
information systems to support its financial improvement. My
testimony is based on our work at DOD.
DOD's FIAR plan, the plan's semiannual updates, and the
FIAR guidance, establish a strategy, track progress, and
provide instructions for DOD military and other components'
achievement of auditability. Interim milestones mark
components' progress towards the ability to produce a full set
of auditable financial statements. Congress has mandated DOD
audit readiness by fiscal year 2017, and Defense Secretary
Panetta has now accelerated to fiscal year 2014 a major
milestone towards that objective, an auditable SBR.
DOD leaders have shown commitment to improving DOD's
financial management, and its components are taking action in
response to our recommendations. Yet, much remains to be done.
We have found problems that continue to impede progress,
including deficiencies in processes and controls, missed
interim milestones, and premature assertions of audit
readiness.
In 2011, we reported on the difficulties of DOD components
in producing an auditable SBR. For example, two assessable
units we selected for review, the Navy and the Air Force, did
not fully follow the FIAR guidance and the work did not support
their conclusions of audit readiness. In our review of the
Army's military payroll processes, staff was not able to locate
documentation needed to support payments to Active Duty
military personnel. We found deficiencies in the Navy's attempt
to reconcile its fund balance with those in the Treasury
records, a key step in preparing the SBR. The Marine Corps has
not been able to receive an opinion on its SBR due to a lack of
supporting documentation. The Marine Corps has made progress in
remediating many of the weaknesses identified in the fiscal
year 2010 audit, and audit efforts continue on the SBR for
fiscal year 2012.
Regarding business transformation, DOD has said that it
considers a successful implementation of its ERPs critical to
transforming its business operations, addressing longstanding
weaknesses, and ensuring that DOD meets its auditability goals.
We have reported that several ERPs have cost overruns and time
slippages. In 2011, we reported that assessment of Army and Air
Force accounting systems found operational problems, gaps in
capabilities that required manual work-arounds, and training
that was not focused on system operations. As a result,
financial services staff had difficulty using these systems to
perform daily operations. Our own assessment of these systems
had similar results.
GAO also reported in 2011 on weaknesses in DOD enterprise
architecture and business processes that affect DOD's
auditability. While DOD and the military departments largely
follow DOD's business process reengineering guidance to assess
business system investments, they have not yet performed the
key step of validating assessment results. DOD has taken
corrective actions in response to our recommendations, and we
have work underway to evaluate its continuing efforts.
In closing, we are encouraged by the sustained commitment
of the DOD leadership. Duty components now have the
responsibility to implement the FIAR plan and respond to our
recommendations and to implement our recommendations and those
of the IG. That must be followed through with actions in full
accordance with the FIAR guidance, and business systems
following the best practice and sustained progress over the
long-term will be needed for full auditability. To support the
subcommittee's oversight, GAO will continue monitoring and
reporting on DOD's financial management improvement efforts.
Madam Chairman, this concludes my prepared statement. I
will be pleased to answer any questions that you or others may
have. Thank you.
[The prepared statement of Mr. Khan follows:]
Prepared Statement by Asif A. Khan
Chairman McCaskill, Ranking Member Ayotte, 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 and related business operations and to achieve audit
readiness. DOD has been required to prepare department-wide financial
statements and have them audited since 1997 but through 2011 has not
been able to meet this requirement.\1\ On October 13, 2011, the
Secretary of Defense directed the department to achieve audit readiness
for the Statement of Budgetary Resources (SBR) for General Fund \2\
activities by the end of fiscal year 2014 \3\ as an interim milestone
toward meeting the mandate in the National Defense Authorization Act
(NDAA) for Fiscal Year 2010 to achieve full audit readiness for DOD's
complete set of financial statements by the end of 2017.\4\ Given the
Federal Government's fiscal challenges, it is more important than ever
that Congress, the administration, and Federal managers have reliable,
useful, and timely financial and performance information, particularly
for the government's largest department.
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\1\ The Chief Financial Officers Act of 1990, Pub. L. No. 101.576,
title III, Sec. 303, 104 Stat. 2838, 2849 (Nov. 15, 1990), initially
required annual audited financial statements of certain DOD components
and activities, but the Government Management Reform Act of 1994, Pub.
L. No. 103-356, Sec. 405, 108 Stat. 3410, 3415 (Oct. 13, 1994),
expanded the annual requirement to department-wide financial statements
beginning with fiscal year 1996, which at the time had to be prepared
no later than March 1, 1997. See 31 U.S.C. Sec. 3515.
\2\ An agency's general fund accounts are those accounts in the
U.S. Treasury holding all Federal money not allocated by law to any
other fund account. GAO, High-Risk Series: An Update, GA0-11-278
(Washington, DC: Feb. 16, 2011).
\3\ DOD, Secretary of Defense Memorandum, ``Improving Financial
Information and Achieving Audit Readiness,'' October 13, 2011.
\4\ Pub. L. No. 111-84, Sec. 1003(a), (b), 123 Stat. 2190, 2439-40
(Oct. 28, 2009).
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Today, I will discuss DOD's progress toward: (1) achieving the
goals of an auditable SBR by fiscal year 2014 and a complete set of
auditable financial statements by fiscal year 2017, including the
development of interim milestones for both audit readiness goals, (2)
acquiring and implementing new enterprise resource programs and other
critical financial management systems, (3) reengineering business
processes and instituting needed controls, and (4) implementing a
comprehensive business enterprise architecture and transition plan, and
improved investment control processes. My statement today is primarily
based on our prior work related to the department's efforts to achieve
audit readiness, implement modernized business systems and a business
enterprise architecture, and reengineer its business processes. In
addition, we are providing information on DOD's updated plans for
achieving auditability presented at a February 2012 briefing.
Specifically, we are presenting a comparison of key milestones in the
February 2012 DOD briefing \5\ that outlined its plans to accelerate
the timeframe to achieve SBR auditability with DOD's May 2011 Financial
Improvement and Audit Readiness (FIAR) plan. We also conducted
interviews with DOD officials about the February 2012 briefing. We did
not independently verify information contained in the February 2012
briefing with DOD or any of its components or agencies. Our work on
which this testimony is based was conducted in accordance with
generally accepted government auditing standards. 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. Additional information on our scope and
methodology is available in previously issued products.
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\5\ Office of the Secretary of Defense (Comptroller), Accelerated
FIAR Plan, presented to the staff of the House Committee on Oversight
and Government Reform, February 14, 2012.
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BACKGROUND
According to the fiscal year 2013 President's budget, DOD accounts
for about 57 percent of the discretionary Federal budget authority.
(See figure 1.)
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
For fiscal year 2011, of the 24 agencies covered by the Chief
Financial Officers Act of 1990 (CFO Act), DOD was the only agency to
receive a disclaimer of opinion on all of its financial statements.\6\
The DOD Inspector General (IG) reported that:
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\6\ In a disclaimer of opinion, the auditor does not express an
opinion on the financial statements. A disclaimer of opinion is
appropriate when the audit scope is not sufficient to enable the
auditor to express an opinion, or when there are material uncertainties
involving a scope limitation--a situation where the auditor is unable
to obtain sufficient appropriate audit evidence.
the department's fiscal year 2011 financial statements
would not substantially conform to generally accepted
accounting principles;
DOD's financial management and feeder systems were
unable to adequately support material amounts on the financial
statements; and
longstanding material internal control weaknesses
identified in prior audits continued to exist, including
material weaknesses in areas such as financial management
systems, Fund Balance with Treasury, Accounts Receivable, and
General Property, Plant, and Equipment.
In 2005, the DOD Comptroller first prepared the Financial
Improvement and Audit Readiness (FIAR) Plan for improving the
department's business processes. The FIAR Plan is DOD's strategic plan
and management tool for guiding, monitoring, and reporting on the
department's financial manage111ent improvement efforts. As such, the
plan communicates progress in addressing the department's financial
management weaknesses arid achieving financial statement auditability.
In accordance with the NDAA for Fiscal Year 2010, DOD provides reports
to relevant congressional committees on the status of DOD's
implementation of the FIAR Plan twice a year--no later than May 15 and
November 15.\7\
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\7\ Pub. L. No. 111-84, sec. 1003(b).
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The NDAA for Fiscal Year 2010 also mandated that the FIAR Plan
include the specific actions to be taken to correct the financial
management deficiencies that impair the department's ability to prepare
timely, reliable, and complete financial management information.\8\ In
May 2010, the DOD Comptroller issued the FIAR Guidance to implement the
FIAR Plan. The FIAR Guidance provides a standardized methodology for
DOD components to follow for achieving financial management
improvements and auditability. The FIAR Guidance requires DOD
components to identify and prioritize their business processes into
assessable units,\9\ and then prepare a Financial Improvement Plan
(FIP) for each assessable unit in accordance with the FIAR Guidance.
Many of the procedures required by the FIAR Guidance are consistent
with selected procedures for conducting a financial audit, such as
testing internal controls and information system controls. In September
2010, we reported that the department needed to focus on implementing
its FIAR Plan and that the key to successful implementation would be
the efforts of the DOD military components and the quality of their
individual FIPs.\10\
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\8\ Pub. L. No. 111-84, sec. 1003(a)(2).
\9\ An assessable unit can be any part of the financial statements,
such as a line item or a class of assets (e.g., civilian pay or
military equipment). a class of transactions. or it can be a process or
a system that helps produce the financial statements.
\10\ 10GAO, Department of Defense: Financial Management Improvement
and Audit Readiness Efforts Continue to Evolve. GA0-10-1059T
(Washington, DC: Sept. 29, 2010).
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A FIP serves as a framework of steps and documentation requirements
for both planning and implementing the FiAR Guidance. For example,
civilian and military pay are two assessable units for which DOD
components such as the Army, Navy, and Air Force are expected to
develop and implement FIPs in accordance with the FIAR Guidance. The
steps required for these plans include assessing processes, controls,
and systems; identifying and correcting weaknesses; assessing,
validating, and sustaining corrective actions; and ultimately achieving
audit readiness. After a component's management determines that an
assessable unit is ready for audit, both the DOD Comptroller and the
DOD Inspector General (IG) review the related FIP documentation to
determine if they agree with management's conclusion of audit
readiness.
DOD intends to progress toward achieving financial statement
auditability by executing the FIAR Guidance methodology for groups of
assessable units across four waves. Under the FIAR Plan, successful
execution of the FIAR Guidance methodology for groups of assessable
units across these waves is intended to result in the audit readiness
of various components' financial statements through fiscal year 2017.
The first two waves of the FIAR Plan focus on achieving the DOD
Comptroller's interim budgetary priorities, which DOD believes should
lead to an auditable SBR. The third wave focuses on accountability for
DOD's mission-critical assets, and the fourth wave focuses on the
remaining assessable units constituting DOD's complete set of financial
statements.
As mentioned earlier, the Secretary of Defense directed the
department to achieve audit readiness for the SBR for General Fund
activities by the end of fiscal year 2014. The NDAA for Fiscal Year
2012 reinforced this directive by requiring that the next FIAR Plan
Status Report--to be issued in May 2012--include a plan, with interim
objectives and milestones for each military department and the defense
agencies, to support the goal of SBR audit readiness by 2014.\11\ The
NDAA for Fiscal Year 2012 also requires the plan to include process and
control improvements and business systems modernization efforts
necessary for the department to consistently prepare timely, reliable,
and complete financial management information.
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\11\ Pub. L. No. 112-81, Sec. 1003, 125 Stat. 1298, 1555 (Dec. 31,
2011).
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The SBR is the only financial statement predominantly derived from
an entity's budgetary accounts in accordance with budgetary accounting
rules, which are incorporated into generally accepted accounting
principles (GAAP) for the Federal Government. The SBR is designed to
provide information on authorized budgeted spending authority reported
in the budget of the U.S. Government (President's budget), including
budgetary resources, availability of budgetary resources, and how
obligated resources have been used.
Overview of DOD's Accounting and Business Operations
In November 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.\12\ 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 retained and the number of personnel they transferred
to DFAS. As DOD's accounting agency, DFAS is critical to DOD
auditability as it records 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 most of DOD's expenditures and are the source of most of the
financial information that DFAS uses to make payroll and contractor
payments. The military services also have responsibility for most of
DOD's assets and the related information needed by DFAS to prepare
annual financial statements required under the CFO Act.
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\12\ DOD Directive 5118.5, ``Defense Finance and Accounting
Service'' (Nov. 26, 1990).
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To support its operations, DOD performs an assortment of
interrelated and interdependent business functions, such as logistics,
procurement, health care, and financial management. As we have
previously reported, the DOD systems environment that supports these
business functions has been overly complex, decentralized, and error
prone, characterized by: (1) little standardization across the
department; (2) multiple systems performing the same tasks and storing
the same data; and (3) the need for data to be entered manually into
multiple systems. For fiscal year 2012, the department requested about
$17.3 billion to operate, maintain, and modernize its business systems.
DOD has reported that it relies on 2,258 business systems, including
335 financial management systems, 709 human resource management
systems, 645 logistics systems, 243 real property and installation
systems, and 281 weapon acquisition management systems.
Importance of Business Enterprise Architecture and Reengineering
Business Processes
For decades, DOD has been challenged in modernizing its timeworn
business systems. Since 1995, GAO has designated DOD's business systems
modernization program as high risk. In June 2011, 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.\13\ As our research on public and private sector
organizations has shown, two essential ingredients to a successful
systems modernization program are an effective institutional approach
to managing information technology (IT) investments and a well defined
enterprise architecture.\14\ For its business systems modernization,
DOD is developing and using a federated business enterprise
architecture, which is a coherent family of parent and subsidiary
architectures, to help modernize its nonintegrated and duplicative
business operations and the systems that support them.
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\13\ GAO, Department of Defense: Further Actions Needed to
Institutionalize Key Business System Modernization Management Controls,
GA0-11-684 (Washington, DC: June 29, 2011).
\14\ GA0-11-684.
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Section 1072 of the NDAA for Fiscal Year 2010 requires that
programs submitted for approval under DOD's business system investment
approach be assessed to determine whether or not appropriate business-
process reengineering efforts have been undertaken. The act further
states that these efforts should ensure that the business process to be
supported by the defense business system modernization will be as
streamlined and efficient as practicable and the need to tailor
commercial off-the-shelf systems to meet unique requirements or
incorporate unique interfaces has been eliminated or reduced to the
maximum extent practicable.\15\
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\15\ Pub. L. No.111-84, Sec. 1072 (amending 10 U.S.C. 2222).
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CHALLENGES IN ACHIEVING AUDIT READINESS
GAO's recent work highlights the types of challenges facing DOD as
it strives to attain audit readiness and reengineer its business
processes and systems. DOD leadership has committed DOD to the goal of
auditable financial statement and has developed FIAR Guidance to
provide specific instructions for DOD components to follow for
achieving auditability incrementally. The department and its components
also established interim milestones for achieving audit readiness for
various parts (or assessable units) of the financial statements. These
efforts are an important step forward. The urgency in addressing these
challenges has been increased by the recent efforts to accelerate audit
readiness time frames, in particular attaining audit readiness for the
department's SBR by fiscal year 2014. Our September 2011 report
highlights the types of challenges DOD may continue to face as it
strives to attain audit readiness, including instances in which DOD
components prematurely asserted audit readiness and missed interim
milestones.\16\ Also, DOD's efforts over the past couple of years to
achieve audit readiness for some significant SBR assessable units have
not been successful. However, these experiences can serve to provide
lessons for DOD and its components to consider in addressing the
department's auditability challenges.
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\16\ GAO, DOD Financial Management: Improvement Needed in DOD
Components' Implementation of Audit Readiness Effort, GA0-11-851
(Washington, DC: September 13, 2011).
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DOD Component Compliance with FIAR Guidance Is Crucial to Ensuring
Audit Readiness
DOD's ability to achieve department-wide audit readiness is highly
dependent on its military components' ability to effectively develop
and implement FIPs in compliance with DOD's FIAR Guidance. However, in
our September 2011 report, we identified several instances in which the
components did not prepare FIPs that fully complied with the FIAR
Guidance, resulting in premature assertions of audit readiness.
Specifically, as we reported in September 2011, the FIAR Guidance
provides a reasonable methodology for the DOD components to follow in
developing and implementing their FIPs.\17\ It details the roles and
responsibilities of the DOD components, and prescribes a standard,
systematic approach that components should follow to assess processes,
controls, and systems, and identify and correct weaknesses in order to
achieve auditability. When DOD components determine that sufficient
financial improvement effort have been completed for an assessable unit
in accordance with the FIAR Guidance and that the assessable unit is
ready for audit, the FIP documentation is used to support the
conclusion of audit readiness. Thus, complying with the FIAR Guidance
can provide a consistent, systematic means for DOD components to
achieve and verify audit readiness incrementally.
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\17\ GA0-11-851.
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We found that when DOD components did not prepare FIPs that fully
complied with the FIAR Guidance, they made assertions of audit
readiness prematurely and did not achieve interim milestones.\18\ While
the components initially appeared to meet some milestones by asserting
audit readiness in a timely manner, reviews of supporting documentation
for the FIPs of two assessable units and full audits of the Marine
Corps' SBR revealed that the milestones had not been met because the
assessable units were not actually ready for audit. For example, the
Navy asserted audit readiness for its civilian pay in March 2010 and
the Air Force asserted audit readiness for its military equipment in
December 2010. However, we reported that neither component had
adequately developed and implemented their FIPs for these assessable
units in accordance with the FIAR Guidance and were therefore not ready
for audit. The Marine Corps first asserted financial audit readiness
for its General Fund SBR on September 15, 2008. The DOD IG reviewed the
Marine Corps' assertion package and on April 10, 2009, reported that
the assertion of audit readiness was not accurate, and that its
documentation supporting the assertion was not complete. GAO has made
prior recommendations to address these issues. DOD has generally agreed
with these recommendations and is taking corrective actions in
response.
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\18\ GA0-11-851.
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Reported DOD Progress toward Audit Readiness for the Statement of
Budgetary Resources
The Secretary of Defense's direction to achieve audit readiness for
the SBR by the end of 2014 necessitated that DOD's components revise
some of their plans and put more focus on short-term efforts to develop
accurate data for the SBR in order to achieve this new accelerated
goal.\19\ In August 2011, DOD's military components achieved one
milestone toward SBR auditability when they all received validation by
an independent public accounting firm that their Appropriations Receipt
and Distribution--a section of the SBR--was ready for audit. In
addition, the November 2011 FIAR Plan Status Report indicated that the
Air Force, achieved audit readiness for its Fund Balance with Treasury
(FBWT).
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\19\ In addition to requiring audit readiness of the SBR, the
Secretary's memo also directed the DOD Comptroller to increase emphasis
on accountability for assets; execute a full review of the department's
financial controls over the next 2 years and establish interim goals
for assessing progress; ensure mandatory training for audit and other
key financial efforts, and establish a pilot certification program for
financial managers; appropriately resource efforts to meet these goals;
and meet the legal requirement for full financial statement audit
readiness by 2017.
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Further, in a February 2012 briefing on its accelerated plans, DOD
indicated that 7 of 24 material general fund Defense Agencies and Other
Defense Organizations are either already sustaining SBR audits or are
ready to have their SBRs audited.\20\ These accomplishments represent
important positive steps. Nevertheless, achieving audit readiness for
the military components' full SBRs is likely to poses significant
challenges based on the longstanding financial management weaknesses
and audit issues affecting key SBR assessable units. Our recent reports
highlight some of the difficulties that the components have experienced
recently related to achieving an auditable SBR, including:
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\20\ According to the February 2012 accelerated plan, the seven
defense agencies and Other Defense Organizations that are already
sustaining SBR audits are the Defense Finance and Accounting
Service(DFAS), Defense Contract Audit Agency (DCAA), TRICARE Management
Activity-Contract Resource Management, Defense Commissary Agency,
Medicare Eligible Retiree Healthcare Fund, Military Retirement Fund,
and the DOD Office of the Inspector General.
the Army's inability to locate and provide supporting
documentation for its military pay;\21\
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\21\ GAO, DOD Financial Management: The Army Faces Significant
Challenges in Achieving Audit Readiness for Its Military Pay, GA0-12-
501T (Washington, DC: March 22, 2012).
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the Navy's and Marine Corps' inability to reconcile
their Fund Balance with Treasury accounts; \22\ and
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\22\ GAO, DOD Financial Management: Ongoing Challenges with
Reconciling Navy and Marine Corps Fund Balance with Treasury, GA0-12-
132 (Washington, DC: Dec. 20, 2011).
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the Marine Corps' inability to provide sufficient
documentation to auditors of its SBR.\23\
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\23\ GAO, DOD Financial Management: Marine Corps Statement of
Budgetary Resources Audit Results and Lessons Learned, GA0-11-830
(Washington, DC: Sept. 15, 2011).
To achieve SBR audit readiness by 2014, DOD and its components need
accelerated, yet feasible, well-developed plans for identifying and
correcting weaknesses in the myriad processes involved in producing the
data needed for the SBR. While DOD has developed an accelerated FIAR
Plan to provide an overall view of the department's approach for
meeting the 2014 goal, most of the work must be carried out at the
component level.
Army's Inability to Accurately Account for Military Pay
The Army's active duty military payroll, reported at $46.1 billion
for fiscal year 2010, made up about 20 percent of its reported net
outlays for that year. As such, it is significant to both Army and DOD
efforts to achieving auditability for the SBR. For years, we and others
have reported continuing deficiencies in the Army's military payroll
processes and controls.\24\ Moreover, other military components such as
the Air Force and Navy share some of these same military payroll
deficiencies.
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\24\ DOD Inspector General, Active Duty Military Personnel Accounts
Were Generally Valid and Secure, but DOD May have Made Improper
Payments, D-2011-093 (Arlington, VA: July 27, 2011); GAO, Military Pay:
The Defense Finance and Accounting Service-Indianapolis Could Improve
Control Activities over Its Processing of Active Duty Army Military
Personnel Federal Payroll Taxes, GA0-09-557R (Washington, DC: June 18,
2009); Military Pay: Hundreds of Battle-Injured GWOT Soldiers Have
Struggled to Resolve Military Debts, GA0-06-494 (Washington, DC: Apr.
27, 2006); Military Pay: Army National Guard Personnel Mobilized to
Active Duty Experienced Significant Pay Problems, GA0-04-89
(Washington, DC: Nov. 13, 2003).
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In March 2012, we reported that the Army could not readily identify
a complete population of its payroll accounts for fiscal year 2010.\25\
DOD's FIAR Guidance states that identifying the population of
transactions is a key task essential to achieving audit readiness.
However, the Army and DFAS-Indianapolis (DFAS-IN), which is responsible
for accounting, disbursing, and reporting for the Army's military
personnel costs, did not have an effective, repeatable process for
identifying the population of active-duty payroll records. For example,
it took 3 months and repeated attempts before DFAS-IN could provide a
population of servicemembers who received active duty Army military pay
in fiscal year 2010. Further, because the Army does not have an
integrated military personnel and payroll system, it was necessary to
compare the payroll file to active Army personnel records. However,
DOD's central repository for information on DOD-affiliated personnel
did not have an effective process for comparing military pay account
files with military personnel files to identify a valid population of
military payroll transactions.
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\25\ GAO, DOD Financial Management: The Army Faces Significant
Challenges in Achieving Audit Readiness for Its Military Pay, GA0-12-
406 (Washington, DC: Mar. 22, 2012).
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In addition, the Army and DFAS-IN were unable to provide
documentation to support the validity and accuracy of a sample of
fiscal year 2010 payroll transactions we selected for review. For
example, DFAS-IN had difficulty retrieving and providing usable Leave
and Earnings Statement files and the Army was unable to locate or
provide supporting personnel documents for a statistical sample of
fiscal year 2010 Army military pay accounts. At the end of September
2011, 6 months after we had provided them with our sample of 250 items,
the Army and DFAS-IN were able to provide complete documentation for
only 2 of the sample items and provided only partial documentation for
another 3 items; they were unable to provide any documentation for the
remaining 245 sample items.
At the time of our report, the Army had several military pay audit
readiness efforts planned or under way. Timely and effective
implementation of these efforts could help reduce the risk of DOD not
achieving the SBR audit readiness goal of 2014. However, most of these
actions are in the early planning stages. Moreover, these initiatives,
while important, do not address: (1) establishing effective processes
and systems for identifying a valid population of military payroll
records; (2) ensuring Leave and Earnings Statement files and supporting
personnel documents are readily available for verifying the accuracy of
payroll records; (3) ensuring key personnel and other pay-related
documents that support military payroll transactions are centrally
located, retained in servicemember Official Military Personnel Files,
or otherwise readily accessible; and (4) requiring the Army's Human
Resources Command to periodically review and confirm that
servicemembers' Official Military Personnel File records are consistent
and complete to support annual financial audit requirements. GAO has
made prior recommendations to address these issues. DOD has agreed with
these recommendations and is taking corrective actions in response.
Navy's and Marine Corps' Inability to Reconcile Fund Balance with
Treasury
A successful audit of the SBR is dependent on the ability to
reconcile an agency's Fund Balance with Treasury (FBWT) with the
Treasury records. FBWT is an account that reflects an agency's
available budget spending authority by tracking its collections and
disbursements. Reconciling a FBWT account with Treasury records is a
process similar in concept to reconciling a check book with a bank
statement. In December 2011, we reported that neither the Navy nor the
Marine Corps had implemented effective processes for reconciling their
FBWT.\26\
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\26\ GA0-12-132.
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The Navy and the Marine Corps rely on the DFAS location in
Cleveland (DFAS-CL) to perform their FBWT reconciliations. We found
numerous deficiencies in DFAS processes that impair the Navy's and the
Marine Corps's ability to effectively reconcile their FBWT with
Treasury records, including the following:
There are significant data reliability issues with the
Defense Cash Accountability System (DCAS), which records daily
collections and disbursements activity. The Navy and Marine
Corps rely on DCAS to reconcile their FBWT to Treasury records.
DFAS-CL did not maintain adequate documentation for
the sample items we tested to enable an independent evaluation
of its efforts to research and resolve differences.
DFAS-CL recorded unsupported entries (plugs) to force
the Navy and Marine Corps appropriation balances to agree with
those reported by Treasury instead of investigating and
resolving differences between these two services' appropriation
balances and those maintained by Treasury.
Navy, Marine Corps, and DFAS-CL officials acknowledged that
existing FBWT policies and procedures were inadequate. Navy and DFAS-CL
officials stated that the base realignment and closure changes from
2006 through 2008 resulted in loss of experienced DFAS-CL personnel and
that remaining staff have not received the needed training. In response
to our recommendations, the Navy is developing a plan of action and
milestones intended to address the Navy's audit readiness weaknesses,
including FBWT required reconciliations.
Difficulty in Auditing the Marine Corps' Statement of Budgetary
Resources
The Marine Corps received disclaimers of opinion from its auditors
on its fiscal year 2010 and 2011 SBRs because it could not provide
supporting documentation in a timely manner, and support for
transactions was missing or incomplete. Further, the Marine Corps had
not resolved significant accounting and information technology (IT)
system weaknesses identified in the fiscal year 2010 SBR audit effort.
The auditors also reported that the Marine Corps did not have
adequate processes and controls, including systems controls, for
accounting and reporting on the use of budgetary resources. Further,
the Marine Corps could not provide evidence that reconciliations for
key accounts (such as FBWT) and processes were being performed on a
monthly basis. The auditors also identified ineffective controls in key
IT systems used by the Marine Corps to process financial data. During
fiscal year 2011, however, the Marine Corps was able to demonstrate
progress toward auditability. For example, its auditors confirmed that
as of October 2011, the Marine Corps had fully implemented 50 out of
139 fiscal year 2010 audit recommendations.
The results of the audit for fiscal year 2010 provided valuable
lessons on preparing for a first-time financial statement audit. In our
September 2011 report, we identified five fundamental lessons that are
critical to success.\27\ Specifically, the Marine Corps' experience
demonstrated that prior to asserting financial statement audit
readiness, DOD components must: (1) confirm completeness of populations
of transactions and address any abnormal transactions and balances; (2)
test beginning balances; (3) perform key reconciliations; (4) provide
timely and complete response to audit documentation requests; and (5)
verify that key IT systems are compliant with the Federal Financial
Management Improvement Act of 1996 \28\ and are auditable. GAO has made
prior recommendations to address these issues. DOD has generally agreed
with these recommendations and is taking corrective actions in
response.
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\27\ GA0-11-830.
\28\ CFO Act agencies' financial management systems are required by
the Federal Financial Management Improvement Act of 1996 (FFMIA) to
comply with Federal financial management systems requirements,
applicable Federal accounting standards, and the U.S. Government
Standard General Ledger at the transaction level, Pub. L. No. 104-208,
div. A, title VIII, Sec. 803, 110 Stat. 3009, 3009-390 (Sept. 30,
1996).
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These issues are addressed in GAO's Standards for Internal Control
in the Federal Government \29\ and DOD's FIAR Guidance. During our
audit, Navy, Army, and Air Force FIP officials stated that they were
aware of the Marine Corps lessons and were planning to, or had,
incorporated them to varying degrees into their audit readiness plans.
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\29\ GAO, Standards for Internal Control in the Federal Government
(Supersedes AIMD-98-21.3.1), AIMD-00-21.3.1, (Washington, DC: November
1999).
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Accelerated Plans for SBR Are in Progress
In its November 2011 FIAR Plan, DOD provided an overall view of it
accelerated FIAR Plan for achieving audit readiness of its SBR by the
end of fiscal year 2014. In its February 2012 briefing, DOD recognized
key factors that are needed to achieve auditability such as the
consistent involvement of senior leadership as well as the buy-in of
field commanders who ultimately must implement many of the changes
needed. The plan also provided interim milestones for DOD components
such as the Army, Navy, Air Force, Defense Logistics Agency, and other
defense agencies. Acceleration substantially compresses the time
allotted for achieving some of these milestones. For example, the May
2011 FIAR Plan Status Report indicated that the Air Force had planned
to validate its audit readiness for many SBR-related assessable units
in fiscal year 2016 and that its full SBR would not be ready for audit
until2017. However, the February 2012 briefing on the accelerated plans
indicated that most of the Air Force's SBR assessable units will be
audit-ready in fiscal years 2013 or 2014. These revised dates reflect
the need to meet the expedited audit readiness goal of 2014. (See
figure 2.)
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
As discussed earlier, the key to audit readiness is for DOD
components to effectively develop and implement FIPs for SBR assessable
units, and to meet interim milestones as they work toward the 2014
goal. According to Navy officials, the Navy plans to prepare a FIP for
each of several assessable units that make up the SBR. For example, for
its SBR, Navy officials told us they have identified assessable units
for appropriations received, and for various types of expenditures for
which funds are first obligated and then disbursed, such as military
pay, civilian pay, contracts, and transportation of people. The Air
Force will prepare FIPs for assessable units similar to those of the
Navy. Army officials told us they are taking a different approach from
the Navy. They said that instead of developing FIPs for discrete
assessable units constituting the SBR, they are preparing only one FIP
for one audit readiness date for the Army's entire SBR, an approach
similar to that of the Marine Corps.
EFFECTIVE IMPLEMENTATION OF BUSINESS SYSTEMS IS CRITICAL
For years, DOD has been developing and implementing enterprise
resource planning (ERP) systems, which are intended to be the backbone
to improved financial management.\30\ DOD considers the successful
implementation of these ERP systems critical to transforming its
business operations and addressing longstanding weaknesses in areas
such as financial and supply-chain management and business systems
modernization. DOD officials have also stated that these systems are
critical to ensuring the department meets its mandated September 30,
2017, goal to have auditable department wide financial statements.
However, as we recently reported, six of these ERP systems are not
scheduled to be fully deployed until either fiscal year 2017 or the end
of fiscal year 2016.\31\
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\30\ An ERP system is an automated system using 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.
\31\ DOD Inspector General, Navy Enterprise Resource Planning
System Does Not Comply With the Standard Financial Information
Structure and. U.S. Government Standard General Ledger, DOD IG-2012-051
(Arlington, VA: Feb. 13, 2012).
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The DOD IG reported that the Navy developed and approved deployment
of the Navy ERP System without ensuring that the system complied with
DOD's Standard Financial Information Structure (SFIS) and the U.S.
Government Standard General Ledger.\32\ The DOD IG further stated that
as a result, the Navy ERP System, which is expected to manage 54
percent of the Navy's obligation authority when fully deployed, might
not produce accurate and reliable financial information.
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\32\ DOD Inspector General, Navy Enterprise Resource Planning
System Does Not Comply With the Standard Financial Information
Structure and U.S. Government Standard General Ledger, DOD IG-2012-051
(Arlington, VA: Feb. 13, 2012).
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Two ERP systems--the Army's General Fund Enterprise Business System
(GFEBS) and the Air Force's Defense Enterprise Accounting and
Management System (DEAMS)--are general ledger systems intended to
support a wide range of financial management and accounting functions.
However, DFAS users of these systems told us that they were having
difficulties using the systems to perform their daily operations.
Problems identified by DFAS users included interoperability
deficiencies between legacy systems and the new ERP systems, lack of
query and ad hoc reporting capabilities, and reduced visibility for
tracing transactions to resolve accounting differences. For example:
Approximately two-thirds of invoice and receipt data
must be manually entered into GFEBS from the invoicing and
receiving system due to interface problems. Army officials
explained that the primary cause of the problem was that the
interface specification that GFEBS is required by DOD to use
did not provide the same level of functionality as the
interface specification used by the legacy systems. At the time
of our review, Army officials stated that they are working with
DOD to resolve the problem, but no time frame for resolution
had been established.
DEAMS did not provide the capability--which existed in
the legacy systems--to produce ad hoc query reports that could
be used to perform data analysis needed for day-to-day
operations. DFAS officials noted that when DEAMS did produce
requested reports, the accuracy of those reports was
questionable. According to DFAS officials, they are currently
working with DEAMS financial management to design the type of
reports that DFAS needs.
While we were told that as of February 2012, the Army and Air Force
had corrective actions under way to address identified deficiencies,
specific timelines had not been developed so that progress could be
monitored.\33\
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\33\ GAO, DOD Financial Management: Implementation Weaknesses in
Army and Air Force Business Systems Could Jeopardize DOD's Auditability
Goals, GA0-12-134 (Washington, DC: Feb. 28, 2012).
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In February 2012, we reported that independent assessments of four
ERPs--the Army's GFEBS and Global Combat Support System (GCSS-Army),
and the Air Force's DEAMS and Expeditionary Combat Support System
(ECSS)--identified operational problems, such as deficiencies in data
accuracy, inability to generate auditable financial reports, the need
for manual workarounds, and training.\34\ DOD oversight authority
limited the deployment of GFEBS and DEAMS on the basis of the results
of the independent assessments. However, in June 2011, DOD authorized
continued deployment of GFEBS and delegated further GFEBS deployment
decisions to the Under Secretary of the Army.
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\34\ GA0-12-134.
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In addition to functional issues, we found that training was
inadequate. According to DFAS personnel as of February 2012, the
training they received for GFEBS and DEAMS did not fully meet their
needs. DFAS personnel informed us that the training focused on an
overview of GFEBS and DEAMS and how the systems were supposed to
operate. While this was benefiCial in identifying how GFEBS and DEAMS
were different from the existing legacy systems, the training focused
too much on concepts rather than the skills needed for DFAS users to
perform their day-to-day operations. GAO has made prior recommendations
to address these issues. DOD has generally agreed with these
recommendations and is taking corrective actions in response.
CHALLENGES IN DEVELOPING AND IMPLEMENTING DOD'S BUSINESS ENTERPRISE
ARCHITECTURE AND INVESTMENT CONTROL PROCESSES
Improving the department's business environment through efforts
such as DOD's business enterprise architecture and improved business
systems management is an important part of helping DOD achieve
auditability. In June 2011, we reported that DOD had continued to make
progress in implementing a comprehensive business enterprise
architecture, transition plan, and improved investment control
processes.\35\ However, we also reported that long standing challenges
had yet to be addressed. Specifically, we reported that while DOD
continued to release updates to its corporate enterprise architecture,
the architecture had yet to be augmented by a coherent family of
related subsidiary architectures.\36\ For example, we reported that
while each of the military departments had developed aspects of a
business architecture and transition plan, none of them had fully
developed a well defined business enterprise architecture and
transition plan to guide and constrain business transformation
initiatives.\37\
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\35\ GA0-11-684.
\36\ DOD's business enterprise architecture approach calls for a
federated approach, in which the architecture consists of a family of
coherent but distinct member architectures that conform to an
overarching corporate or parent architecture.
\37\ GA0-11-684.
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We also reported in June 2011 that DOD continued to improve its
business system investment management processes, but that much remained
to be accomplished to align these processes with investment management
practices associated with individual projects and with portfolios of
projects.\38\ With regard to individual projects, DOD and the military
departments all had documented policies and procedures for identifying
and collecting information about IT projects and systems to support
their business system investment management processes. However, neither
DOD nor the military departments had fully documented policies and
procedures for selecting a new investment, reselecting ongoing
investments, integrating funding with investment selection, or
management oversight of IT projects and systems. With regard to
portfolios of projects, DOD and the Departments of the Air Force and
Navy had assigned responsibility for managing the development and
modification of IT portfolio selection criteria. However, neither DOD
nor the military departments had fully documented policies and
procedures for creating and modifying IT portfolio selection criteria;
analyzing, selecting, and maintaining their investment portfolios;
reviewing, evaluating, and improving the performance of their
portfolios; or conducting post implementation reviews. In addition,
while DOD largely followed its certification and oversight processes,
we reported that key steps were not performed. For example, as part of
the certification process, DOD assessed investment alignment with the
business enterprise architecture, but did not validate the results of
this assessment, thus increasing the risk that decisions regarding
certification would be based on inaccurate and unreliable information.
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\38\ These best practices are identified in GAO IT investment
management guidance. See GAO, Information Technology Investment
Management: A Framework for Assessing and Improving Process Maturity,
GA0-04-394G (Washington, DC: Mar. 2004).
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Since 2001, we have made recommendations to improve DOD's business
architecture, enterprise transition plan, and business system
investment management.\39\ DOD has generally agreed with these
recommendations and is taking corrective actions in response. It is
essential that DOD implement our recommendations aimed at addressing
these longstanding challenges, as doing so is critical to the
department's ability to establish the full range of institutional
management controls needed for its financial management as well as its
overall business systems modernization high-risk program. We have
ongoing work to evaluate the department's efforts to comply with the
NDAA for Fiscal Year 2012, as amended, including updating our
evaluations of DOD's comprehensive business enterprise architecture and
transition plan and improved investment control processes.
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\39\ See, for example, GAO, Information Technology: Architecture
Needed to Guide Modernization of DOD's Financial Operations, GA0-01-525
(Washington, DC: May 17, 2001); DOD Business Systems Modernization:
Improvements to Enterprise Architecture Development and Implementation
Efforts Needed, GA0-03-458 (Washington, DC: Feb. 28, 2003); Business
Systems Modernization: DOD Continues to Improve Institutional Approach,
but Further Steps Needed, GA0-06-658 (Washington, DC: May 15, 2006);
Business Systems Modernization: Strategy for Evolving DOD's Business
Enterprise Architecture Offers a Conceptual Approach, but Execution
Details Are Needed, GA0-07-451 (Washington, DC: Apr. 16, 2007);
Business Systems Modernization: DOD Needs to Fully Define Policies and
Procedures for Institutionally Managing Investments, GA0-07-538
(Washington, DC: May 11, 2007); DOD Business Systems Modernization:
Progress in Establishing Corporate Management Controls Needs to Be
Replicated Within Military Departments, GA0-08-705 (Washington, DC: May
15, 2008); DOD Business Systems Modernization: Recent Slowdown in
Institutionalizing Key Management Controls Needs to Be Addressed, GA0-
09-586 (Washington, DC: May 18, 2009); Organizational Transformation:
Military Departments Can Improve Their Enterprise Architecture
Programs, GA0-11-902 (Washington, DC, Sept 26, 2011).
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DOD HAS BEGUN PERFORMING BUSINESS-PROCESS REENGINEERING ASSESSMENTS
Section 1072 of the NDAA for Fiscal Year 2010 requires that new DOD
programs be assessed to determine whether or not appropriate business-
process reengineering efforts have been undertaken. The act further
states that these efforts should ensure that: (1) the business process
to be supported by the defense business system modernization will be as
streamlined and efficient as practicable; and (2) the need to tailor
commercial off-the-shelf systems to meet unique requirements or
incorporate unique interfaces has been eliminated or reduced to the
maximum extent practicable.\40\ In June 2011, we reported that, for
those investments we reviewed, DOD and the military departments used
DOD's Business Process Reengineering Guidance (dated April 2011) to
assess whether the investments complied with the business-process
reengineering requirement.\41\ Consistent with the guidance, DOD and
the military departments completed questionnaires to help them identify
and develop approaches to streamlining and improving existing business
processes. Once these assessments had been completed, the appropriate
authorities asserted that business-process reengineering assessments
had been performed.
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\40\ Pub. L. No.111-84, Sec. 1072.
\41\ GA0-11-684.
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We also reported in June 2011 that while DOD and the military
departments largely followed DOD's guidance, they did not perform the
key step of validating the results of these reengineering assessments
to ensure that they, among other things, accurately assessed process
weaknesses and identified opportunities to streamline and improve
affected processes. The reason DOD did not follow key aspects of the
certification process-primarily not validating assessment results-was
attributed in part to unclear roles and responsibilities. According to
military department officials responsible for the investments we
reviewed, validation activities did not occur because DOD policy and
guidance did not explicitly require them to be performed. In addition,
there was no guidance that specified how assessments should be
validated. According to DOD officials, the oversight and designated
approval authorities did not validate the DOD level assessments and
assertions because DOD policy and guidance had not yet been revised to
require these authorities to do so. We have work underway to evaluate
DOD's efforts to improve its business system investment process,
including its efforts to address the act's business process
reengineering requirement. GAO has made prior recommendations to
address these issues. DOD has agreed with these recommendations and is
taking corrective actions in response.
CONCLUDING OBSERVATIONS
In closing, DOD has demonstrated leadership and sustained
commitment since the first issuance of its FIAR Plan in 2005 and
through improvements and responsiveness to our recommendations since
then. DOD has made progress through the FIAR Guidance, with the
development of a methodology for implementing the FIAR strategy. Full
compliance with the guidance can provide a consistent, systematic
process to help DOD components achieve and verify audit readiness.
Without full compliance, as we have seen in our work, components may
assert audit readiness while process deficiencies prevent validation,
require corrective actions, and delay an audit for another fiscal year.
Automated information systems are essential for modern accounting
and recordkeeping. DOD is developing its ERP systems as the backbone of
its financial management improvement and they are critical for
transforming its business operations. To be fully successful,
implementation of ERP systems should be consistent with an effective
corporate enterprise architecture and the development of streamlined
business processes. DOD officials have stated that these systems are
critical to ensuring that the department meets its mandated September
30, 2017, goal to have auditable department-wide financial statements.
However, implementation has been delayed by deficiencies in performance
and the need for remedial corrective actions. DOD components will
evaluate cost-effective modifications to legacy systems and implement
any necessary changes. According to DOD officials, for the ERP systems
that will not be fully deployed prior to the audit readiness goals, the
DOD components will need to identify effective workaround processes or
modifications to legacy systems that will enable audit readiness.
DOD faces considerable implementation challenges and has much work
to do if it is to meet the goals of an auditable SBR by fiscal year
2014 and a complete set of auditable financial statements by fiscal
year 2017. It is critical that DOD continue to build on its current
initiatives. Oversight and monitoring will also play a key role in
making sure that DOD's plans are implemented as intended and that
lessons learned are identified and effectively disseminated and
addressed. Absent continued momentum and necessary future investments,
the current initiatives may falter, similar to previous well-intended,
but ultimately failed, efforts.
We will continue to monitor the progress and provide feedback on
the status of DOD's financial management improvement efforts. We
currently have work in progress to assess: (1) the FIAR Plan's risk
management process for identifying, assessing, and addressing risks
that may impede DOD's ability to achieve the 2017 financial audit
readiness goal; (2) DOD's funds control in relation to the reliability
of its financial statements; (3) the schedule and cost of Army's GCSS;
(4) components' efforts to prepare for SBR and full financial statement
audits; and (5) DOD's actions in response to our recommendations. 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.
Chairman McCaskill, Ranking Member Ayotte, and members of the
subcommittee, this completes my prepared statement. I would be pleased
to respond to any questions that you may have at this time.
GAO CONTACTS AND STAFF ACKNOWLEDGMENTS
If you or your staff have any questions about this testimony please
contact me at (202) 512-9869 or khana@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this testimony. GAO staff who made key contributions
to this testimony include Valerie Melvin, Director; Cindy Brown Barnes,
Assistant Director; Mark Bird, Assistant Director; Kristi Karls;
Michael Holland, Chris Yfantis, and Maxine Hattery.
Senator McCaskill. Thank you, Mr. Khan.
I think that Secretary Panetta's directive for 2014 is one
of those good news/bad news things. I think it is good news
because it really gets everyone leaning forward in a way that
perhaps they had not been. The bad news is I am worried about
this manual work-around.
I would like all of you to address this, and you can decide
whether or not it is the CMO or whether it is the Assistant
Secretaries that do this. I need a yes or no about whether or
not you are envisioning a manual work-around for a one-time fix
to get to the 2014, and can you make any representations today
on the record that you will avoid a manual work-around, that
you would be more willing to say we cannot do it than do a
manual work-around that is very expensive and does not solve
any long-term problem? We will start with the Air Force and
work our way down the table.
Dr. Morin. Senator McCaskill, I can assure you there will
be some manual workarounds required, but we will not do a
large-scale, army of auditors, fully manual approach. We will
rely on our existing financial systems, admittedly some of
which date back to the Vietnam war, but we will rely on a
series of systems that have differing degrees of controls in
them. In some cases, we will have to do manual reconciliations
between those systems because they do not interface. That will
be labor-intensive, but it is not thousands of people type
labor-intensive. We will try to strike a careful balance in
assessing internal controls and finding out where we can rely
on them. In some cases, there will be a level of manual work-
around, but it will not be an enterprise-scale manual work-
around which is, I think, what you are talking about here.
Senator McCaskill. I will probably circle back once I get
everybody's answer because I think we need to try to get our
arms around this in terms of what costs are going to be.
Ms. Matiella. It did create some manual workarounds for us.
Basically we have to do more cleanup in the legacy system. It
was cleanup that we had not planned on doing, that we did not
feel like we needed to do because it, the program, was
basically going to cancel. It is not going to cancel with the
due date that is now 2014. So we have to do the cleanup now,
but that is a one-time fix. So once you get that cleanup done,
those beginning balances correct, those opening balances
correct, they are correct forever. It is a one-time fix. It is
a manual work-around. It will not create continuing work for
us. So it is something that we are planning for and that we
have budgeted for, and we believe that is doable by 2014 and
will not be something that will set us back going into 2017 at
all.
Ms. Commons. For the Department of the Navy, we feel that
the manual work-arounds will be at a minimum. First of all, our
ERP is well-deployed. We only have two more commands that we
are going to deploy, and we will have completed our program of
record. What we are finding in our ERP is that the internal
controls built into the system are, in fact, working. We tested
some transactions in the system and we know that the controls
around the system are fairly good.
Also, for our legacy systems, we have always built our
transactions down at the transaction level. So we know we have
some systems issues to work there, but we feel that we are
working those issues and that we are moving forward in the
right direction.
For our reconciliations, especially with FBWT, we are
working with the DFAS to automate that process. It is a manual
process at this point, but we think that we are making good
progress and that we will be there within the timeframe for the
auditable SBR, as well as 2017.
So we really believe that we are looking at our business
processes end-to-end and that we are trying to make
improvements in those processes for the long-term, not just to
achieve an audit-ready SBR, but long-term improvement.
Senator McCaskill. Secretary Hale?
Mr. Hale. If I could summarize, I would say that there will
be some manual work-arounds. We see them as temporary. The
General Fund Enterprise Business System (GFEBS), the Army
system, for example. We have had some problems. We are doing
some manual work-arounds. The Army is engaged, along with DFAS,
in fixing the business process problems that led to those, and
I expect that we will be back on track without manual work-
arounds, I hope fairly quickly. As Dr. Morin said, there will
be some issues the Air Force's DEAMS, because they will not
have it in place, but they will get DEAMS at some point.
So I think yes for some, but I expect them to be temporary,
and I would echo what was said here. We are not going to hire
an army of auditors to do this manually. That is not
sustainable and it is not our plan.
Senator McCaskill. Do you think before 2014, Secretary
Hale, that you are going to be able to put a figure on what the
manual work-arounds for a 2014 deadline are going to cost over
and above what we would be expending had the deadline not been
moved?
Mr. Hale. We could try. I am reluctant to commit to that
because it probably would not be as easy as it may sound.
Senator McCaskill. No, I do not think it sounds easy. I
think it sounds really hard.
Mr. Hale. I think it would be difficult.
Senator McCaskill. But the problem is if you do not do that
analysis upfront, then you really are not making a sound
management decision as to whether or not it is worth it to move
up the date.
Mr. Hale. But I would argue strongly we need the pressure
that is generated by the 2014 deadline. We need to pressurize,
it is like turning an aircraft carrier. We have to be hard
right or hard left. We have to get this organization moving,
and I think this shorter deadline has done it. So if it drives
us to some modest manual workarounds, so be it. I think we will
get to the end game more quickly and save money sooner.
I will think about whether or not we can quantify that, but
I believe there are some qualitative benefits to the earlier
goal that are significant.
Senator McCaskill. I am not trying to pick a fight here
about this. I really just genuinely want to have some sense of
this. I think I am legitimately entitled to some skepticism
because of the amount of monies that have been expended in this
effort and the billions of dollars that clearly have not turned
out to be wise investments in terms of what they have produced
to date.
What I do not want to have happen is--when you say a modest
investment, ``modest'' needs context because I think most
Americans would think that what you might consider modest might
be a heck of a lot of scratch in order to meet this earlier
deadline.
I am glad that Secretary Panetta has done this overall. I
think it is very positive because I do think it is going to
help really push everyone as hard as they can possibly be
pushed to get some of these problems resolved. But I want to
make sure that we are not in the process being shortsighted.
Frankly, it reminds me a little bit of Base Realignment and
Closure (BRAC). Sometimes we have extremely high upfront costs
for benefits that sometimes are exaggerated way down the line
further than when everyone had been told they were. So I want
to make sure we are not having one of those upfront
expenditures that does not, in the long run, show that it is
worth the investment.
Mr. Hale. If I get to compare my cost to BRAC, I am in good
shape.
Senator McCaskill. Then it would be modest. You are safe
with ``modest'' if you compare it to BRAC.
Mr. Hale. We spent $35 billion on the last BRAC round. We
are not going to be in that ball park.
We will try to think about that problem systematically and
get back to you.
Senator McCaskill. I have a number of other questions, but
I will defer to my colleague, Senator Manchin, because I know
he has some questions he wants to ask. I will come back for
more after.
Senator Manchin. Thank you, Madam Chairman. I appreciate it
so much and all of your service. I appreciate your all being
here. I want to apologize for running back and forth to
committee meetings, but that is sometimes how it happens here.
Secretary Hale, if I may, I am sure you are scrutinizing
contracting very closely since it accounts for about 55 percent
of the DOD budget in 2011, and there are so many examples of
fraud, waste, and abuse.
I recently met with the National Guardsmen who say that a
contractor knowingly exposed them to sodium dichromate in Iraq
during the cleanup of the Qarmat Ali water treatment plant,
which I think you all know about. There is even a recent DOD
report that faults this contractor for not protecting the
nearly 1,000 soldiers who guarded the site, and West Virginia
had a number of those soldiers. The report states that the
contractor recognition of, and response to, the health hazard
represented by sodium dichromate contamination, once identified
at the Qarmat Ali facility, was delayed. The delay occurred
because the contractor, KBR, did not fully comply with the
occupational safety and health standards required by the
contract. As a result, a great number of servicemembers and DOD
civilian employees were exposed to sodium dichromate and for
longer periods.
This was a $28 billion contract to restore this plant and
the surrounding oil fields. There is ongoing litigation, so I
am not going to go into all the details, but soldiers have
died. Many more have lasting illnesses because of the exposure.
I talked to one of the widows yesterday.
The most troubling part of this contract is the indemnity
clause which I could absolutely not believe at all that this
Government would enter into a $28 billion contract with an
indemnity clause that lets the contractor totally off the hook.
Even if the contractor knowingly does something wrong like
expose soldiers to a known carcinogen, it means that the
taxpayers will foot the blatant contractor abuse.
So my question is simply this, sir. Do we have any
contracts like this in Afghanistan?
Mr. Hale. Senator Manchin, I am not familiar enough to
answer that question. It is a good one. I can tell you that we
have the well-being of our soldiers, sailors, airmen, and
marines fully in mind. But I am going to need to answer for the
record or get somebody who is more of an expert on this to come
talk to you.
Senator Manchin. The bottom line. It took so long for this
contract to be revealed to what was going on and why such a
blatant protection of a contractor that was charging $28
billion and held totally harmless--totally harmless--by this
Government. It is just hard to explain to these widows. I have
so many people involved and exposed on this. I would like to
see and know if we have some contracts that we might have out
there that have these types of indemnity clauses or hold
harmless.
To Mr. Khan, if I may. Your testimony is important because
DOD accounts for 57 percent of discretionary spending, more
than all of the agencies combined. The fiscal future of our
Nation, I do not think I need to tell you, depends on us
getting this right.
I said throughout all of these posture hearings I am
concerned that we are cutting 100,000 servicemembers by 2017,
but no one can tell me how many contractors we are cutting. I
cannot even get an accurate figure on how many we have. We have
more contractors in Afghanistan and Iraq than we do American
troops. I am told that we have approximately 150,000
contractors compared to about 90,000 men and women in uniform.
It makes common sense to me as an American, which I think we
all love our military and we are so appreciative of what they
do, that given the choice between the soldier and an overpaid
contractor performing the same mission, that I would choose the
soldier.
Let me tell you when I was down visiting our troops in
Afghanistan, I had soldiers coming to me from my State of West
Virginia, and I would say, ``are you signing back up?'' They
said, ``no, no. I am going to work for that person. I can get
so much more money.'' I said, ``if that job was not available,
would you stay in the Service? Probably so.'' Something is
wrong, sir, desperately wrong. I just cannot even believe it.
I would like to know from you, sir, just offer your
perspective on the overdependence on contractors at DOD.
Mr. Khan. That is an area really I am not an expert or
specialist in. I can respond to that for the record. But I
share your concerns on the overdependence on the contractors.
[The information referred to follows:]
The Department of Defense (DOD) has relied extensively on
contractors to provide needed services, including those in support of
operations in Iraq and Afghanistan. Over the past 15 years, we have
made numerous recommendations intended to improve DOD's management and
oversight of contractors in deployed locations. For example, in 2008,
we recommended that DOD determine the appropriate balance of
contractors and military personnel as it shapes the force for the
future.\1\ As part of this effort, DOD would need to comprehensively
examine the support it will require contractors to provide in future
operations and the core capabilities the department believes it should
not be relying on contractors to perform. Given the longstanding and
recurring nature of the issues identified, in June 2010 we called for a
cultural change that emphasized an awareness of contractor support
throughout the department.\2\
---------------------------------------------------------------------------
\1\ GAO, Military Operations: Implementation of Existing Guidance
and Other Actions Needed to Improve DOD's Oversight and Management of
Contractors in Future Operations, GAO-08-436T (Washington, DC: Jan. 24,
2008).
\2\ GAO, Warfighter Support: Cultural Change Needed to Improve How
DOD Plans for and Manages Operational Contract Support, GAO-10-829T
(Washington, DC: June 29, 2010).
---------------------------------------------------------------------------
While there are benefits to using contractors to perform services
for the government, our work has shown that reliance on contractors to
support core missions can place the government at risk of becoming
overly reliant on contractors to perform functions deemed inherently
governmental or those that are closely associated with inherently
governmental functions. Our work has identified the need for DOD to
obtain better data on its contracted services to enable it to make more
strategic workforce decisions and ensure that it maintains appropriate
control of government operations.
DOD has taken steps to gain better insights into the number of
contractors and the functions they perform, but its efforts have had
mixed success to date. Examples of our recent findings in this area
include the following:
As we reported in April 2012, DOD has made incremental
improvements to its processes for compiling and reviewing
statutorily required inventories of contracted services, but
DOD acknowledged a number of factors that limited the utility,
accuracy, and completeness of the inventory data.\3\ The
department does not expect to fully collect required data on
contractor manpower as part of the inventory until fiscal year
2016. Further, we found that during the military departments'
review of the fiscal year 2009 inventories, the Army and Air
Force identified 1,935 and 91 instances, respectively, of
contractors performing inherently governmental functions. In 8
of the 12 Army and Air Force cases we reviewed, contractors
continued to perform functions identified by the military
departments as inherently governmental. We found no evidence
that the Navy commands we contacted had conducted the required
reviews of the inventories to determine, among other matters,
whether contractors were performing inherently governmental
functions.
---------------------------------------------------------------------------
\3\ GAO, Defense Acquisitions: Further Actions Needed to Improve
Accountability for DOD's Inventory of Contracted Services, GAO-12-357
(Washington, DC: Apr. 6, 2012).
---------------------------------------------------------------------------
In 2008, DOD designated the Synchronized Predeployment
and Operational Tracker (SPOT) as its system for tracking
specific information on certain contracts and associated
personnel in Iraq and Afghanistan. While recent efforts have
been made to improve SPOT's tracking of contractor personnel,
in reports issued annually since 2008, including most recently
in September 2012, we reported DOD lacked reliable data and
systems to report on its contracts and contractor personnel in
Iraq and Afghanistan.\4\
---------------------------------------------------------------------------
\4\ GAO, Iraq and Afghanistan: Agencies Are Taking Steps to Improve
Data on Contracting but Need to Standardize Reporting, GAO-12-977R
(Washington, DC, Sept. 12, 2012).
---------------------------------------------------------------------------
As we reported in September 2012, DOD's 2010-2018
workforce plan did not include an assessment of the appropriate
mix of military, civilian, and contractor personnel or an
assessment of the capabilities of each of these workforces.\5\
DOD is directed by statute to use this plan, among other
things, to make determinations on the most appropriate and
cost-efficient mix of military, civilian, and contractor
personnel to perform the department's mission.\6\ Therefore,
without an assessment of the appropriate workforce mix and
capabilities, DOD is not well positioned to make determinations
on its current and future use of contractors.
---------------------------------------------------------------------------
\5\ GAO, Human Capital: DOD Needs Complete Assessments to Improve
Future Civilian Strategic Workforce Plans, GAO-12-1014 (Washington, DC,
Sept. 27, 2012).
\6\ Pub. L. No. 112-81, Sec. 936 (2011) (codified at 10 U.S.C.
Sec. 2330a).
Senator Manchin. Let me give some ratios to all of you and
---------------------------------------------------------------------------
see if it makes sense to any of you.
World War I, we had 1 contractor for every 24
soldiers.
World War II, we had 1 contractor for every 7
soldiers.
Vietnam, 1 contractor for every 5 soldiers.
The Balkans and Iraq, it was 1-to-1.
Currently in Afghanistan, we have more than a 1-to-1 ratio.
I do not know how the growing reliance that DOD has--how
you choose to deploy your resources. I do not know how you
would do that in an effective and efficient manner.
Mr. Hale. Senator Manchin, what we need to do is think
about the criteria for jobs. There are some jobs that ought to
be done by contractors, and I fear that sometimes we demonize
our contractor workforce in a way that is not helpful. We could
not fight effectively without them. But there are certainly
jobs that need to be done by Federal civilians and by military
personnel. I will not say we have that right or perfect, but we
are certainly looking at it. I can tell you, for example, that
our contractor dollars from 2012 to 2013 go down in similar
levels to our civilian workforce and our military workforce. So
you are seeing some downturn in contractors.
But I would caution against just blanket statements that we
do not want contractors. There are jobs they should do,
temporary jobs, jobs with special skills. Auditing is a good
example. We do not have the skills in DOD to do audits well.
They know how to do it better in the private sector. That is
temporary work, at least we hope so. We need to hire people
temporarily to do that and we are. So I would urge you to avoid
blanket pronouncements, but I accept the fact that we need to
look at the mix.
Senator Manchin. Let me ask you a direct question then,
sir. Can you get me an answer on the difference of pay between
the front-line service person that is doing exactly the same
job as the soldier in uniform?
Mr. Hale. First, I do not think any contractor is doing
exactly the same job as a front-line soldier.
Senator Manchin. When a soldier tells me with his own mouth
and he says I am going to go do exactly what I am doing now,
whether he is protecting, whether he----
Mr. Hale. I will ask for help from----
Senator Manchin. I just want an answer. I cannot get an
answer from anybody.
Mr. Hale. I do not think they are doing exactly the same
thing.
Senator Manchin. I beg to differ with you, sir. They are.
If you will just go to the front lines and talk to the
soldiers.
Mr. Westphal. Senator, we have done an analysis and a
review of the number of contractors, and we are doing this very
complex analysis, which is what you are getting at here, of
what is a uniquely governmental function that we need to have
either a soldier or a civilian employed by the Government do
the job or a contractor. In that report, we have been able to
identify the number of full-time equivalents that we are
contracting for the generating force and what we have for the
operating force. So we have some fidelity. It is not precise on
the number of contractors both in what we call the generating
force, which is all the support elements to our operating
force, and our operating force. Then what is the equivalence in
dollars.
To do that analysis, we have gone and looked at exactly
what you just asked, which is what are the benefits and pay and
all of the things that accrue to a civilian or to a soldier and
what does the same thing mean for a contractor, and we are
finishing up that report.
I know, Senator McCaskill, Madam Chair, you had a hearing
on the subject of contracting. So I know there is a great deal
of interest on this, and we are trying to get those answers.
Senator Manchin. Can I get a comparison on the pay? All I
am asking for is a comparison on the pay. Even if you do not
think they do the exact same job, as close to a job as the two
would do, if I could get that.
Can you tell me how many contractors you are cutting? If
you are proposing to cut 100,000 men and women in uniform by
2017, can you tell me how many contractors you are prepared to
cut?
Mr. Westphal. We will get you that.
[The information referred to follows:]
This year for the first time the Army will be able to consciously
make tradeoffs between military personnel, civilians, and contractors
in a strategic way. This will replace the current process of just
managing contracted services in the year of execution.
In order to gain more fidelity on the value of contractors, the
Army is using the Contractor Manpower Reporting Application (CMRA) to
provide cost and manpower data. By utilizing the CMRA and its Panel for
Documenting Contractors process in support of its budget submission,
the Army will be able to project future year contractor numbers. This
newly-established process for making projections will enable the Army,
for the first time, to start to consciously make tradeoffs between
military, civilians, and contractors in a strategic way, rather than
simply continuing the current process of just managing contracted
services in the year of execution. We are not there yet, but expect to
move in this direction as the Department of Defense implements CMRA on
an enterprise basis.
In the near-term, by implementing the CMRA, the Army has an
accurate count of the number of contractor used in fiscal year 2011.
This fiscal year 2011 data will provide the baseline for the Army's
future year contractor projections and will inform future year budget
estimates. This will result in more accurate future year contractor
estimates, beginning with forecasting the number of contractors for
fiscal years 2012 to 2014.
These numbers although more accurate are still just estimates,
because unless specifically authorized by statute, most contracted
services are performance-based and not personnel-services-based.
Therefore, these contracted services are not managed or controlled
based on manpower but through funding constraints applied in the year
of execution.
As the military and the civilian forces downsizes, the Army
anticipates making comparable reductions in numbers of contractor
personnel. The reduced funding levels projected for the Army through
2017 will require deliberate and sustained planning and analysis to
ensure that the Army's military, civilian, and contractor workforce is
properly balanced, adequate, and affordable.
Additionally, you have asked for a cost comparison of contractor
costs and military and civilian personnel costs. The CMRA data is what
will allow the Army to make more accurate contractor cost comparisons
with civilian and military personnel cost.
When comparing costs of military, civilian, and contractor labor,
it is imperative to compare the fully-burdened costs to Department of
Defense and the Federal Government, as opposed to base pay alone. As
detailed in the Office of the Secretary of Defense's Directive Type
Memorandum 09-007, dated January 29, 2010, a full cost comparison of
total compensation, benefits, training, retirement, and other cost
considerations must be utilized when making workforce mix decisions.
The fully-burdened costs of soldiers and civilians vary greatly
because of factors like location, skill level, and years of service.
The fully-burdened cost of an Active Army officer can range from
$119,000 to $331,000 and the fully-burdened cost of an Active Army
enlisted can range from $78,000 to $181,000. The fully-burdened cost of
a General Service (GS) civilian can range from $33,000 to $202,000. For
example, the average fully-burdened cost of an Active Army captain, pay
grade O-3, is $166,000, while the average fully-burdened cost of a rank
equivalent civilian, a GS-11, is $103,000. Contractor costs are even
more variable and sensitive to factors such as location, type of
service performed (e.g. Medical, Transportation, IT, etc.), skill
level, availabilities due to different shifts, contractor leave
policies, and overhead. To further complicate the comparison no direct
military/civilian to contractor rank equivalency exists. The fully-
burdened average unit cost of a Contractor ranges from $36,000 to
$437,000. Therefore, any direct comparisons of military/civilian to
contractor workforce cost should be addressed on a case-by-case basis.
Senator Manchin. Thank you, sir.
Senator McCaskill. Thank you.
Senator Ayotte.
Senator Ayotte. Thank you very much, Madam Chair.
I wanted to ask all of you, we have seen with the General
Services Administration (GSA) the rightful public outrage and
outrage from this Congress about the misuse of taxpayers'
funds, inappropriate use of taxpayers' funds for mind readers
and all kinds of things that is just completely unacceptable.
Please tell me how we can assure that each of your departments
has proper oversight and controls in place to make sure that
that type of misuse of taxpayers' funds never happens within
DOD, please.
Ms. McGrath. I will start. With regard to specifically the
conferences, I can tell you that in the November timeframe, we
completed a thorough review across DOD to ensure we had proper
controls and policies in place for conferences, and each of the
heads of components reviewed and attested to the Deputy
Secretary that those were in place.
Following what I will call the GSA incident, we have gone
back out to all of our heads of components in the military and
actually across DOD to once again, look and to assure that they
have proper controls in place to make sure we have not missed
anything. We asked for a review of all conferences that have
occurred in the last 2 years, and that is to be reported back
to the Deputy Secretary on May 11. So we absolutely take this
very seriously. Each of the components can attest to their
specific actions and activities, if you like, but I can say
that we are absolutely ensuring that we have proper controls in
place so that things like that do not happen.
Mr. Westphal. If I could, the Secretary of the Army issued
a directive over a year ago on this matter which is to look at
all of the conferences done by the Department of the Army, the
costs, and to have a process by which conferences are approved.
That was partly due to cost-cutting requirements that we had,
but partly also to ensure that we were not doing anything
excessive. So I think we can provide you that policy, that
directive. I believe the Navy and the Air Force have adopted
something similar.
Senator Ayotte. We would be very interested in receiving
that. I think it is important. We have to be able to account to
taxpayers. When I think about some of the reductions that you
are asked to make, it would be completely unacceptable to find
out that our taxpayers' dollars were somehow going to
conferences that were wasteful or somehow did not address core
training important opportunities that are needed for our
military. So, yes, I appreciate that you are looking at this,
and we would love to see a copy of that.
Mr. Tillotson. From the Department of the Air Force point
of view, we have implemented similar policies. I think Ms.
McGrath and Secretary Westphal have captured the thought. The
Secretary issued guidance out to the field about a year ago. We
have followed up since that time several times, and it has been
reiterated, I can assure you, to all command levels as recently
as last week to make sure that we are following diligently the
policies we have already put on place, as well as collecting
the information over the last 2 years to support Ms. McGrath's
review.
Mr. Work. The Department of the Navy has a very similar
thing, ma'am. What we have is a tiering system in which
commanders at lower levels can, for example, approve
conferences for maybe $100,000, but anything of great expense
has to come all the way to either the Assistant Commandant of
the Marine Corps or the Vice CNO, or in the case of the
secretariat, to the Administrative Assistant who works for the
Secretary. So like all of the other Services, there is a tiered
system in which we monitor very closely, and we have flags. For
example, if it goes to an area that might be considered a nice
place to go, like Las Vegas, the first thing we always ask is
why are you going to Vegas? If they cannot prove that that is
the cheapest opportunity for taxpayers, then we deny it.
Senator Ayotte. I appreciate that and we certainly would
like to see your policies and appreciate that this is something
you have already put a focus on prior to this incident that was
really a complete debacle.
[The information referred to follows:]
Mr. Westphal. See attached memo.
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Mr. Work. In May 2012, the Office of Management and Budget (OMB)
released a memorandum to promote further efficiency and cost
consciousness and directed the government to reduce cost and improve
efficiencies in areas such as travel and conferences. The Department of
Defense (DOD) issued amplifying guidance that directed the heads of
each component or service to review all conferences that their
organization was hosting or sponsoring. In June 2012, the Department of
the Navy, in response to the OMB and DOD guidance, issued the attached
updated conference guidance and data call.
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Mr. Morin. See attached memo (28 Oct. 2011 Air Force POlicy
Memorandum--Conferences).
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Senator Ayotte. Let me just ask you, Secretary Hale.
Government-wide Federal agencies have reported an estimated
$115 billion in improper payments in fiscal year 2011, and in
turn, we have only recovered, as I understand it, a little over
$1 billion of those over $120 billion. Now, that is over across
all Federal agencies.
So I would ask Secretary Hale and also Mr. Khan, how much
did DOD pay in improper payments over the last fiscal year, and
how much of that amount has been recovered? What are we doing
to make sure that we are clamping down on overpayments and also
recovering money that has been overpaid?
Mr. Hale. We have an aggressive program. I will start with
the end. We have an aggressive program, we believe, to look for
improper payments. I will give you some examples, and it varies
by the category of payment.
For commercial payments, we use a system called the
Business Activity Monitoring (BAM) system. It is a set of
business rules that looks for payments that look suspicious,
and then kicks them out. If they have the same number and the
same date or a similar date and amount, it will kick them out
for human review. The BAM system has, we think, been quite
effective.
TRICARE, which is our medical system that pays providers,
has built into all their contracts what amounts to a recovering
auditing procedure where they look after the money has been
paid for whether there have been overpayments.
We are developing, in connection with the legislation
Congress passed a couple of years ago, a post-payment sampling
procedure for all of our payment categories so that we will
statistically go back and verify that we have reasonable
levels.
I believe it is around $1 billion of improper payments.
That is $1 billion too much, but it is a tiny portion of our
budget. We do have a recovery procedure. Many of those improper
payments are personnel, and we tend to get those back very
quickly. We have the best set of auditors in the world for
personnel, which is all the people that receive the money, and
they tend to look very carefully at their paychecks and tell us
if there is a problem. Many of them will tell us if it is too
high. They will all tell us if it is too low, I think. We are
usually able to quickly correct those problems.
I think we have a good program, but it is one that needs
continued attention because we are aware that in this day and
age we need to have as few as possible, preferably zero,
improper payments.
So let me get you more specific numbers on the exact amount
and the recovery.
[The information referred to follows:]
Fiscal Year 2011:............... Total Department- $1139.5 million
wide improper
payments:
Department-wide 0.18 percent
error rate:
Total $456.4 million
underpayments*:
Total $683.1 million
overpayments:
Total $368.6 million
recoveries:
Recovery rate (1 54 percent (fiscal
year) year 2011 only)
Recovery rate 93 percent (fiscal
(cumulative) years 2004-2011)
* Underpayments are not subject to recovery.
In response to your question on what the Department of Defense
(DOD) is doing to prevent improper payments, we use a computer software
tool (called Business Activity Monitoring) that utilizes algorithmic
logic to identify potential duplicate and overpayments in time for a
technician to review and stop disbursement if the transaction is
identified as potentially improper. We also analyze the root causes of
our payment errors to see if technicians need additional training, or
if a system edit could help prevent future errors. DOD also conducts
regular outreach meetings with vendors and contractors to explain the
importance of accurate invoicing and to encourage single invoice
submissions where possible, rather than multiple submissions. For
example, if a vendor submits an invoice through regular mail and then
also submits it electronically, it is possible this could result in a
duplicate payment.
DOD also has an aggressive debt management program to recover
improper payments. One area that is proving especially successful is
where a debt in one part of DOD (let's say the Army) can be offset
against a payment pending in another part of DOD (for example, the
Navy). We call this our Centralized Offset Program. We have also
partnered with Treasury by transferring outstanding debts at day 120
instead of day 180 which is the legal threshold. By doing this earlier
transfer, there is a better chance for recovery because Treasury has
access to collection tools not available to other Federal agencies that
enhance the collection of debt.
Senator Ayotte. I appreciate that.
Mr. Khan, I do not know if you had anything to add to that.
Mr. Khan. I am not going to dispute the numbers that
Secretary Hale has just mentioned. It is just that going back
to fiscal year 2010, we had concerns about DOD not including
all classes of transactions which were captured in the
methodology for calculating improper payments. We understand
this year--the class of transaction I am referring to is
commercial pay--that that is included in the methodology for
calculating improper payments. We do have work underway to look
at--essentially it is done on a sampling basis as to how robust
the methodology this year is to come up with the improper
payments numbers. Again, we are also going to look at recovery
auditing as part of that body of work. So we will have more
information forthcoming later on this year.
Senator Ayotte. Thank you.
I just wanted to ask one final question with the chair's
permission.
We have this problem with the end-of-the-fiscal-year
spendathon. How do we solve this? How do we get to the point
where there is not this position and what are we doing about
it, this idea that at the end of the fiscal year, program
managers and everyone involved have to try to find ways to
obligate money so that they are getting to the end of the
fiscal year and we do it on things that we do not need because
of this concern that if you do not do it, you come before us
and say, well, they did not obligate all their money last year,
they did not need it all, so we can give them less.
So help us with this because, I think, it is not only a
problem in DOD, I think it is a problem across the Federal
Government. But I know that it is a problem in DOD because I
have spoken to people at the highest levels about it and I have
spoken to people at the lowest levels about how this happens.
Mr. Hale. I share your concern. There are some rules in
place that Congress has put in place that we can only obligate
so much of our operating dollars in the last 2 months, and we
do adhere to that. But it is still a lot of money, and I do not
think it solves it all.
I will tell you something called the Budget Control Act is
probably one of the better ways to do this. There is just going
to be a lot less free money, and we will be looking for ways to
reprogram--and I would like to address that in a moment, if I
might--funds to meet what are probably more than $3 billion of
unbudgeted fuel bills, some very substantial increases above
budgeted levels for operating tempo in Afghanistan. I think it
will soak up a lot of the dollars.
But I hear your concern. In a private business, if you have
found a way to save money at the end of the year and still meet
customer needs, you would probably get a bonus.
Senator Ayotte. You would get a bonus.
Mr. Hale. We, unfortunately, do not do that, and there is
some of what you said, that we do judge, to some extent, by the
amount of obligations.
So I will not sit here and tell you it is not a problem. I
think that tighter times will help correct it, and there are
some rules in place that try to discourage it.
Do any of my colleagues want to add to that?
Mr. Westphal. I totally agree.
The other issue that we get, as we work through Continuing
Resolutions and the lack of a budget, we are also in many cases
under-executing on parts of our budget. That creates a
different kind of culture within the enterprise about how
dollars are allocated. So we need a tighter process all the way
around. We need a better sense of our budget obligations where
Congress can be helpful and we need a better sense ourselves to
manage through that.
I think we are getting the mechanisms. I do not know if you
can talk about this. In the Army we have some mechanisms to
address this end of the year.
Ms. Matiella. We do a very aggressive major review. For
example, we are doing that right now. We are looking at
obligation rates. We are making sure that folks are on track
according to their plan because everybody has a plan, an
expenditure plan, out there. So if we see that they are not
spending according to plan, then we ask them why and they have
to come back and give the reasons. Then at that point, we
evaluate whether they are even capable of spending the money.
If not, there are other areas where there is a need. So the
mid-year review process looks at that and tries to push back on
people spending according to plan, and if they are not able to,
what is it that is out there that is unfunded that needs to be
addressed.
Dr. Morin. Ma'am, if I could add on behalf of the Air
Force. We are working on a number of lines in order to address
this challenge. As Mr. Hale said, some of them are getting
addressed naturally by the more scarce dollars, and the fact
that the Air Force is looking at a more than $1.4 billion fuel
price shortfall will mean that we are tapping all of our other
operational accounts looking for the sources to pay for that.
So that will reduce available funds for all activities whether
end-of-year spending or otherwise.
But I would also say that we are looking at some of the key
areas of challenge. End-of-year spending typically migrates to
things like information technology and support contracting. For
information technology, as part of our broad enterprise-level
efficiency initiatives, we have moved to more strategic
sourcing and enterprise-level buys of that technology, which
will make it harder for local operations to identify and buy
ahead of need, if you will, for information technology because
they have available resources. It will bring those monies back
to headquarters for prioritization.
Similarly, service support contracts are being very
carefully tracked as part of our efficiency effort. We are
projecting a 30 percent decline in service support contract
funding for 2013 compared to 2010, and we are enforcing those
restrictions. So again, the ability to migrate dollars into
that at the end of year is constrained.
But I think most importantly, what we are doing is working
to change a culture of spend-it-all. You particularly see this
with our acquisition programs where our progress reviews that
the financial and acquisition personnel conduct out in the
field with the program managers and program financial officers
are focusing on right-sizing and right-timing resources. It may
be that a program needs more resources in 2012 and fewer
resources in 2013 because a particular piece is available
earlier. It may be the opposite. We work to realign those
resources, take money that is made available and apply it to
higher priority warfighter needs. We have an open discussion
with those program managers where they are incentivized to find
savings to address the substantial list of execution-year
challenges that emerge in the context of running an enterprise
of the scale of the defense establishment.
Senator Ayotte. I thank you all. I want to thank the chair
for her patience.
Also, I would suggest if it is not already a criteria, that
performance evaluations be part of the measure, how much money
did you return to the taxpayers. Thank you.
Senator McCaskill. It reminds me of that episode of The
Office where Steve Carell found out that he had $4,300 left and
he had to spend it by the end of the day or he was going to
lose it in next year's budget, and they had to decide whether
to buy a new copier or new office chairs. Near the end of the
day, the CFO in the office explained to him that he could get
15 percent of it in a bonus if he did not spend it at all. You
can imagine what he decided to try to do.
Unfortunately, we do not have that at DOD, and we waste a
lot of money because of it.
Mr. Hale. I wonder if I might say a word about
reprogramming?
This is an area that is very important to DOD. We depend on
this, and we work hard to be transparent and to have discipline
in this process. I am well aware that concerns have been raised
in Congress and by a number of members about it.
But I did want to put it in context for you. Last year in
2011, we did policy reprograms. Congress allows a certain
amount of mechanical transactions between funds, which are just
that; they are mechanical. Our policy-related ones were about
$18 billion. That is a huge sum of money, but it is less than 3
percent of our budget. We put budgets together a full 2 years
in advance before we complete executing them. 97 percent 2
years in advance does not sound that bad to me. We need that
flexibility.
I understand we also need to do better at things like new
starts and to minimize them--and I am working to do fewer
September reprogrammings. The last one just did not work out
for a variety of reasons. But I would appeal to you to not
judge the whole process harshly. We need it to meet the needs
of the warfighters and to make effective use of taxpayers'
dollars.
Senator Ayotte. I appreciate that and I understand that. I
think where we become concerned, is when it is leading us in
directions that we did not authorize or we said as a policy
matter as a group, we do not want you to go in this direction.
That is where we become concerned or starting something new. So
I think those are the areas where we become particularly
concerned. I am not saying that you do not need flexibility. So
I appreciate that very much.
Senator McCaskill. I am going to try to get to some of the
nitty-gritty on some of the things we have talked about today
now. I do think we do need context. While I understand this
conference in Las Vegas is deplorable and embarrassing and
horrible for taxpayers, if you look in context, the reason it
has become such a big deal is it is so easy for everyone to
understand. It is so easy for everyone to visualize it.
Therefore, it is very easy to communicate it, and it is the
kind of thing around here that allows everyone to do righteous
indignation and photo ops because it is bad and it is easy for
people to understand.
Now, this stuff is not. It is the opposite. It is very
difficult to understand. I have really worked at it to try to
understand it.
But just to give context so people understand, we have a
defense integrated military human resource system that we spent
12 years on and more than $1 billion in an effort to modernize
the military payroll and personnel systems. Of course, we had
to cancel it 2 years ago. Now, if you look at that, that makes
that money spent on that conference in Las Vegas look like
couch change.
If I look at all the 11 ERP programs, we now cumulatively
are $6 billion over budget and 31 years behind schedule. Now,
that is a problem. I know you are all working on it and I sense
how focused you are and I do think improvements have been made.
So I am not here to say that we are not doing better because I
think we are. But I do think that if everyone out there
understood the magnitude of the issues that we face in terms of
financial accountability in DOD, maybe they would be more
focused on this than on the clowns and the mind readers in Las
Vegas.
Let me talk a little bit about the inability to account for
funds in Afghanistan. I have been worried about the accuracy of
distribution of our money to the payroll of the Afghanistan
National Army (ANA). I know that the IG identified almost $50
million worth of errors in the ANA payroll advances. They
concluded this was possible because DOD did not have written
procedures or perform adequate reviews and they relied on
summary and not detailed data when distributing the quarterly
advances.
After all the problems we had in Iraq and after all the
reports of the Special Inspector General for Iraq
Reconstruction there, how is it possible that we still have
this level of failure in terms of written procedures or review
as it relates to the expenditures of funds in Afghanistan?
Mr. Hale. I am not familiar with this, I am embarrassed to
say. I will get familiar with it. I am going to ask if any of
my colleagues are aware.
Ms. Matiella. I am not familiar with the issue. However, I
can propose that anytime there is a problem, it is because the
systems, like you said, are not there to do the work that they
need to do. As you well know, in the Department of the Army,
our legacy systems just cannot do that kind of work. That is
why we are rolling out a new system, a system that will have
much more discipline, that is much more integrated than the
ones we have now.
Senator McCaskill. Is the ANA payroll coming through the
Army or is it coming through OSD?
Mr. Hale. I think it would be through the Army, and we do
pay them. This is American money. I believe it is done through
the Army.
Senator McCaskill. I understand. There is a lot of the
subject covered here. If you will get back to me on this
particular problem because I want to make sure that we are
doing better on that.
Mr. Hale. We will.
[The information referred to follows:]
Since the Department of Defense (DOD) Inspector General (IG)
investigation was completed in December 2011, the NATO Training
Mission-Afghanistan/Combined Security Transition Command-Afghanistan
(NTM-A/CSTC-A) has redesigned the Afghanistan National Army (ANA)
payroll distribution process, implemented internal control procedures,
and developed detailed standard operating procedures. The payroll
advances described in the DOD IG report have been replaced with the
current Direct Contributions process whereby ANA budget managers are
provided a financial commitment ceiling from NTM-A/CSTC-A, and
Financial Management Oversight offices at NTM-A/CSTC-A provide
oversight and control. Furthermore, NTM-A/CSTC-A has put into practice
four initiatives that have improved internal controls and mitigated
fraud within the ANA payroll process: integration of financial advisors
who work on-site in close cooperation with the ANA Corps Finance
Officers; implementation of a monthly pay verification process;
implementation of a centralized pay system; and improved banking
operations.
The ANA payroll funding is provided by the Office of the Secretary
of Defense (OSD) to Army who releases the funding to NTM-A/CSTC-A.
During the commitment letter process between NTM-A/CSTC-A and the
Afghans, OSD is notified of the total payroll fiscal ceiling for Direct
Contribution to the ANA. The commitment letter requires ANA budget
managers to specifically identify which items require funding by Afghan
budget code (e.g., salaries and food, incentives) instead of an overall
bottom line amount. Any deviation at the fund code level requires
written approval and an amendment to the distribution authorization.
When funds are required by the Afghans, a funding request from the
Afghanistan Ministry of Finance is processed through the Defense
Finance and Accounting Service and wired to the Ministry of Finance
into the ANA corporate account.
Senator McCaskill. I noticed that Mr. Work said that the
Navy will be shutting down more than 100 legacy systems over
the next few years. Do the other branches have numbers for me
on how many legacy systems and what the plans are that you are
going to be shutting down? Air Force or Army, do you have any
numbers for me on legacy systems?
Ms. Matiella. Overall, we are going to shut down 700 legacy
systems as we implement the different ERPs that we have. So to
date, for example, with GFEBS we have shut down 80 systems so
far. But in the long run, our goal is to shut down 700 systems.
Senator McCaskill. Okay, and the Air Force?
Mr. Tillotson. For the two ERPs, DEAMS and ECSS, the target
was nine systems, as I recall, for DEAMS and about 240 systems
for ECSS. The ECSS shutdown, obviously, has been delayed. So
those plans, which should have been executing over the next
several years are now put out. As we deploy DEAMS, over the
next 2 years, we will get a partial shutdown for each base that
we go to. We will not get the full shutdown until DEAMS goes to
full operational capacity, which is about in 2016 or
thereabouts.
We are looking, however, at our broader range of business
systems, and I will get back to you with the kinds of numbers
we are looking at there. Those are unrelated ERPs. This is part
of the broader business system review that we have been
conducting all along but we have put renewed emphasis on as a
result of the 2012 language that directs us to go back and look
at business expenditures of $1 million or more over the Future
Years Defense Program.
[The information referred to follows:]
Yes. Separate from the 2 Enterprise Resource Planning systems
previously described the Air Force plans to shut down 65 legacy systems
over the next 3 years.
Senator McCaskill. Are there any legacy systems that you
want to speak to at OSD?
Ms. McGrath. I can add that we just submitted our annual
report on business operations, and we do articulate a
termination or shutdown of 120 systems across the board. I
think it is important to note that regarding systems and
instantiations of systems, there is sometimes an art in the way
we count. The 120 that we report back to you this year comes
from our DOD IT repository. What we are counting includes
multiple instantiations of systems. Not to make this more
complicated, but there are many different versions of systems
that are out there. So when you are hearing really big numbers,
all that is very good news, but the way we count from a
departmental level, we would count those multiple
instantiations as one, even though there may be more than one
out there in existence.
Senator McCaskill. What you are referring to is you would
have one system with a lot of modifications that had occurred
over time, and so you are counting each modification as a
separate system as opposed to that entire enterprise.
Ms. McGrath. Or if we have a system that is deployed in the
Navy and it is the same one that is deployed in the Army, we
would count those as two instantiations of the same system.
They both have the same name.
So, I would just caution: This has been a long dialogue
with regard to how we count systems and what those definitions
are. Again, it is all very good news in terms of shutting down
and rationalizing the legacy environment. When we report on an
annual basis to you, we are very specific about the
authoritative data source that we use.
I can say unequivocally we have terminated 120 systems that
were in the DOD inventory last year, in addition to some of
what the military departments are articulating in terms of
various instantiations. It is all good news, and I do not mean
to complicate it, but it is important to understand where the
numbers come from.
Senator McCaskill. Yes, Secretary Westphal?
Mr. Westphal. Madam Chair, if I could. The Army went
through a series of portfolio reviews on each of our enterprise
systems. I just held a meeting on each one of them to have a
report on how many of the legacy systems we are in fact--as we
integrate these enterprise systems, we are eliminating.
I have asked our staff to get together with those two great
folks that you have behind you there, Mr. Levine and Mr.
Carrillo, to report to them about the results of the portfolio
reviews. I do not know if they have received that report yet.
But I wanted the committee--because I think the three Under
Secretaries have been in great partnership with your staff over
the course of the last year and a half meeting on a regular
basis and sending our folks to report on these activities to
get some feedback, but also to keep you and the membership
involved.
So on these portfolio reviews, I think at least the Army
will be able to give you a pretty good assessment of where we
are in terms of those legacy systems and what progress we
intend to make this year as we integrate across all these
different portfolios.
Senator McCaskill. Okay.
You mentioned GFEBS, let me go down that road.
According to the DOD IG, GFEBS does not have effective
internal controls and, as a result, does not contain accurate
and complete general ledger information as required by
applicable law.
At about the same time, GAO reported that approximately
two-thirds of the invoice and receipt data must be manually
entered into the Army's GFEBS system from the invoicing and
receiving system due to interface problems, and the system's
limitations significantly affect users' abilities to perform
their daily task. As a result, Army installations were
certifying year-end data with caveats and notes relating to
inaccurate, incomplete, and missing data.
This system, this General Fund Enterprise Business System,
was initiated more than 7 years ago and is scheduled to be
effectively deployed this summer--fully deployed. How soon do
you think you can address these problems, and do you agree with
both the findings of GAO and the DOD IG as it relates to these
problems?
Ms. Matiella. Some of this work was done almost 2 years
ago, and since then, GFEBS has gone through a lot of reviews
and a lot of fixing. Like you said, at this point we are almost
fully deployed. We have 45,000 users on the system. We project
to have about 55,000 users in the end. We have closed out
several years. We got a clean opinion on appropriations
received. After exam 1, which examined three different
installations and how they used GFEBS, we got a qualified
opinion on that. We are getting ready to roll out exam 2. So we
are doing a lot of self-checking, and through that self-
checking, we are improving GFEBS.
At the time that they did the audit, we were not as
compliant as we are now. Right now we are 95 percent compliant
with Standard Financial Information System (SFIS) requirements
which DOD requires and that the Army Audit Agency (AAA) checks
for us. So we have made a lot of improvements in GFEBS since
that time.
However, we still have problems and we continue working on
those problems. The Army has been very aggressive, but it is a
system that shows--I have talked with different CFOs throughout
Government about this software. It is systems, applications,
and products (SAP) software. I have talked with them about
whether--for example, SAP is used by the Department of
Agriculture who has a clean opinion and got a clean opinion
with this software. So I have talked to them about how they
rolled it out, how they were using it, and they are all
believers in the fact that this is good software. So it is just
a matter of us learning how to use it, making sure that we are
improving the way we use it, so that we are interfacing into it
correctly. We do have interface problems, but we are getting
data that drops out of it. That itself has also improved. Our
reject rate is much lower than it used to be. We are tracking
it. We send weekly reports to the CMO and to Secretary Hale
about how we are improving those reject rates. So we are
holding ourselves very accountable for improving it. So we see
a bright future for GFEBS.
Senator McCaskill. Mr. Khan, do you have any comment on
Secretary Matiella's comments?
Mr. Khan. The GFEBS problem highlights an issue which is a
bigger issue, the issue of the manual work-around that we
highlighted in our report. That is because of the information
the ERPs are going to be receiving from the feeder systems, the
older systems, which are going to have to continue operating
because there are so many of them. This is an issue which other
ERPs also will be facing because the system operational entries
of the feeder system and then that has to really get
communicated into ERPs. If that is not done correctly, then
there would be a need for manual work-arounds.
Ms. McGrath. Ma'am, I would just agree with what Asif just
articulated in terms of the challenges, in terms of passing the
data from the legacy environment into the ERP. We do not have
standard data across the enterprise, and so it becomes evident
in the implementations. That is why we are working from an end-
to-end perspective, because if we do not, then we will never
fix the ECSS. We have to take that broader perspective to your
point earlier about the business process reengineering. It
requires us to bring forward all of the legacy practices and
change them so that when we are implementing these ERPs, we
have a holistic approach to the data and the systems and the
training aspects that have been identified.
Senator McCaskill. Stepping back from this, do you think we
have made--if you look at what has been a common problem in all
of these struggles, it has been data standardization and it has
been the specs on interface. So if 5 years ago, on a scale of 1
to 10, we were a 1 on data standardization and interface specs,
are we at a 5 now? Can we measure our progress? Because really
that is what has caused a lot of these overruns and the date
sliding and a lot of the money that has been wasted. Am I
correct? Those two issues?
Mr. Westphal. You are, Madam Chair. I will give you one
example of what I think you are trying to show here. If you
take the Army's personnel system and its financial systems,
they were two separate systems that did not interface. So
consequently when an auditor says how do I know Colonel
Westphal is really married? Colonel Westphal has been in the
Army for 30 years. Somebody goes back and looks and cannot find
a marriage certificate because 30 years ago there was a
different way of doing that and the personnel system was not
interfacing with the financial system. So this enterprise
system, IPPS-Army, will integrate those two systems, and it
will be one individual who will enter data. So you will not
have different stovepipes entering separate data that is not
going to give that auditor the things he needs.
The GAO was right. That documentation was not there, and
therefore it could not verify that we were making the right
payments at the right time at the right place. We hope to fix
that.
Unfortunately, IPPS-Army is not going to be fully
deployable until 2017. So we have a lot of work to do between
now and then to get those records in place, first of all, to
come up within the Army and figure out what are the rules about
what documents are going to be acceptable. A marriage
certificate may be acceptable in one place but somebody else
might say that is difficult to get. They come in different
forms and shapes from each State. So we have to have some way
to line up those requirements across the board, and that is
what we are working on.
Senator McCaskill. Mr. Khan, what would your reaction be to
overall where are we on data standardization and interface
specs?
Mr. Khan. Data standardization is very critical, especially
given the accelerated date of 2014 and the plans of the
Services to use the legacy systems longer than expected without
data standardization. It is not really going to be feasible how
the information from the legacy systems or the feeder system is
going to get input into ERPs or how they will be able to
produce financial statements.
Going back to your original question, where we are compared
to 5 years ago, the SFIS initiative--that was the initiative to
standardize the data within DOD. That really has gone through
fits and starts and really has not reached the degree of
maturity it should have to this point in time. So it still
needs a fair amount of work to get to where it needs to be.
Senator McCaskill. Maybe I need to talk to Secretary
Panetta and say we need a deadline for data standardization. We
will get to some significant manual work-arounds on that.
Even before Secretary Panetta established the 2014 goal,
the Navy plan called for achieving an audit-ready SBR by the
end of the third quarter of 2013. The most recent update we
received indicates that that Navy schedule is slipping. For
example, the Navy had planned to begin audit for its
reimbursable orders in the second quarter of 2012, but now it
has skipped to the first quarter of fiscal year 2013. You had
planned to begin audit of its requisitioning orders in the
second quarter of 2012, but that has slipped to the second
quarter of 2013. You had planned to begin audit of its
contracts in the second quarter of 2012. That has slipped to
the third quarter of 2013, and planned to do an audit of its
FBWT in the fourth quarter of fiscal year 2012, but the goal
has now slipped to the fourth quarter of 2013.
What is the postponement of these milestones about, and how
is it going to impact your 2014 deadline?
Ms. Commons. Madam Chairman, we still believe that we will
meet the 2013 date that we established. We believe that by the
end of fiscal year 2013, that we will have an audit-ready SBR.
What we are finding in our discovery, as we go through
these processes, we are finding that we need to take more
corrective actions than originally planned. We want to go
through a very deliberate process.
We are not rushing this just to meet a deadline. We want to
ensure that when we make changes to our business processes,
that these are long-term improvements. That is one reason that
we are focused on our business processes end-to-end, not just
looking at financial pieces, but we are going from the
beginning of the process to the very end to ensure that when we
make changes to the process, that it will result in an audit-
ready statement. So much of the delay is that in discovery, we
have found that we need to make more corrective actions.
With regard to reimbursable work orders, we realize that it
is a government-wide problem. It is not simply a problem that
DOD can solve by itself because we get reimbursable work orders
from across the Federal Government. We need to have a
methodology for accounting for that, and I believe we are all
working to figure out exactly what to do in that process so
that we can do the necessary eliminations.
So basically we understand that we are moving some of the
dates out but primarily because the corrective actions will
take some time. We also need to have time to test those
corrective actions to make sure that the things that we have
put in place actually work. So we want to have a very
deliberate process to be able to have an audit-ready SBR.
Senator McCaskill. Mr. Khan, let me ask you about one of
your findings--I think it was just last month--about the
difficulty the Army is going to have meeting the 2014 date
because of deficiencies with payroll processes and controls.
One of the findings was that the Army did not have an
effective, repeatable process for identifying the population of
Active Duty payroll records. This is a big deal because it is
$46 billion. It is a lot of money. Could you comment on whether
or not you think that the Army has established a viable
approach to addressing this particular finding in your audit?
Mr. Khan. At the point in time we had done our field work,
they were in the process of addressing that issue, but we were
not able to validate whether or not they had come up with a
repeatable process. We had highlighted in that report many of
the processes and systems that are used by the Army are also
used by the Air Force and the Navy. So we just wanted to
highlight that. That is an issue that both the other two
Services should also really keep in mind when they are coming
up to their SBR timeline.
Senator McCaskill. Do you think you have made some
improvements in that area? Do you think you have something that
will pass the standard in terms of an effective, repeatable
process?
Mr. Westphal. We think we are on our way to get there, but
boy, we are working very hard right now to get that
documentation and get it ready for 2014. So we are working very
hard on it and we will keep you apprised of that as well.
Senator McCaskill. In 2010, the Marine Corps asserted that
its SBR was ready for audit but was unable to get the clean
audit. GAO reviewed the audit findings and concluded the
failure was attributable in part to the fact that the Marine
Corps did not have adequate process and system controls and
controls for accounting and reporting on the use of budgetary
resources. The Marine Corps developed an action plan and
milestones in response to that finding and sought a new audit
for fiscal year 2011 SBR. However, GAO found that many of the
Marine Corps' actions did not address the specific auditor
recommendations and other actions were not adequate to correct
the underlying problems.
Some of this is just underlying internal control problems,
which if you do not get that fixed, you cannot dress it up. You
have to start with the internal controls or you are never going
to get that clean opinion that you are all working so hard to
get.
So talk to me about that. I would like both Mr. Khan and
Secretary Commons to address, why would you push for another
audit if you had not addressed the internal control issue? Was
it a miscommunication or a lack of understanding about what was
going to be necessary? Or did you think you had solved the
problem and were disappointed to find that you had not?
Ms. Commons. The Marine Corps has, in fact, addressed many
of the issues that were identified in the findings and
recommendations. Many of those were systems issues which will
take time to correct. So we felt it important to continue the
audit because of the lessons that we are learning from the
Marine Corps.
We agree with you that internal controls are key. We have
to address the internal controls across DOD, not just in the
Marine Corps but across the entire DOD, and the Marine Corps
has taken action to do that. In fact, the DOD IG recommended
that we continue the audit because the Marine Corps had made
significant progress. So we believe that we are solving those
issues that we can do in the short-term. There are some long-
term issues we are going to have to continue to work on.
Mr. Hale. Can I add a thought there, Madam Chairman?
Senator McCaskill. Sure.
Mr. Hale. I believe that we would have been better off to
jump in the pool and get a private auditor to look at what we
have done. Often we have done this for small parts. The Marine
Corps was an exception where we did it for the entire SBR. But
we just found they know a lot more about what we need to do
frankly, and we did not know what we did not know. So I think
it has been very helpful to have that audit. We have learned a
great deal, and I have encouraged the other Services and they
are doing it. Whenever they think they are reasonably close--I
realize we cannot just do this whimsically, but when they are
reasonably close, let us go get somebody in here and pass the
test or not pass the test, and if we do not, they will usually
tell you why.
Senator McCaskill. They better. That is part of their job.
Right, Mr. Khan?
Mr. Hale. They should, as you know from your career better
than I do.
So I think this strategy of going to audit when we think we
are reasonably close is a good one. It is not cheap, but it is
not cheap to not get there either. So I endorse it strongly,
and we are going to pursue it.
Senator McCaskill. Do you have Yellow Book experience,
which you all know, I assume, Yellow Book is the Bible of
government auditing? Do you have people internally that are
familiar with Yellow Book standards and auditing processes? How
much of this are we outsourcing? Frankly, I think going through
a trial run audit is a great idea. It is a great learning
process, but if we are buying one from a full-blown private
accounting firm, as complicated as your enterprises are, I do
not want to think about what your bills are. In fact, do not
tell me because then I will be off on a tangent----
Mr. Hale. So I will not tell you.
Senator McCaskill--about contracting for personal services
that are beyond the pale.
So why can we not get either through DCAA or--one time I
tried to count how many auditors were in DOD between IG, DCAA,
DCMA, GAO, everybody who worked at DOD, and I think I got to
30,000 when I stopped counting. Now, a lot of them are not
doing audit functions. A lot of them are doing different kinds
of functions, but they are within organizations that would be
considered audit-like.
So could we not get a team of trained government auditors
within DOD to be a roving squad to put people through their
paces on audit work and come up with findings and would be
illustrative to these different branches as to where they are
in the process that maybe would not be as expensive as hiring a
full-blown audit from the outside?
Mr. Hale. First, we are trying to develop more skills. I
wish we had more. We have some. We have some good people, and I
will ask my colleagues to comment on this.
As far as using the internal audit agencies, it will
violate the independence rules. GAO will not allow that.
Senator McCaskill. Not GAO. What if we got a special hit
squad from DCAA and----
Mr. Hale. First, DCAA is a pricing audit agency. They do
not do financial statement audits. They are auditors.
Senator McCaskill. Yes, but a lot of them are Yellow Book.
Mr. Hale. I have them pretty busy doing other things right
now.
Senator McCaskill. I can go find you a bunch--I can go out
to State auditors offices----
Mr. Hale. You could do that.
Senator McCaskill--and find you a team of government-
trained auditors that you could get a lot less expensively than
$500 an hour.
Mr. Hale. I think we would get into independence problems
there too if they really worked for me or for any of the
unders.
Senator McCaskill. Yes, but you are not trying to do this
to get a clean opinion. You are doing it for training.
Mr. Hale. Let me ask the Services to comment on their
remediation efforts and the extent they have people.
Dr. Morin. Ma'am, if I may.
Senator McCaskill. Yes.
Dr. Morin. Ma'am, we have been trying to do this within the
limits of audit independence and have had some reasonable
success. The Air Force Audit Agency has provided a team of
about 25 of their auditors that are focusing for us on just
targeted areas of internal control investigation that directly
support our audit readiness effort. They are not telling me, go
in and do this to pass an audit, in quite those terms, and they
are not themselves auditing in that sense, but they are doing
very targeted investigations of key controls that are driven by
our audit readiness plan. Then we will, of course, have
another, a separate auditor, come in and do an eventual
examination.
Senator McCaskill. Of course. Obviously, I am not
suggesting that we would ever hire anyone to do audits
internally. That would not work. But having the expertise
inside that can help with guideposts. I get that you wanted to
try again because you had made progress and you wanted to see
how much progress you had made. I think that is all good. But
the basics of internal controls I think a lot of government
auditors could have helped with that would have not needed a
whole----
Ms. Matiella. I believe that certifications are very
important. They show a skill set. For example, the
certification of being a Certified Public Accountant (CPA) is
an important skill set to have when you are trying to become
auditable or create financial statements that are auditable. I
am a CPA. My audit director is a CPA. It is a very valuable
skill to go out and hire. It does make a difference in terms of
knowing what is required by the Yellow Book.
We also use our AAA to a large extent to check us, to be
independent but also to check us to make sure that we are doing
the right thing.
Senator McCaskill. I think that is great.
Mr. Work. Ma'am, we are doing something very similar. We
have about 30 members of the Naval Audit Service that go out.
They did surprise audits. The first thing they looked at was
internal controls. We identified a major issue there. Then we
started to populate that around all of the different budget
submitting offices.
Then the second thing that we go in and look at is, do they
have the right documentation. These are lessons learned from
the Marine Corps audit.
So we will continually step up what they will look at.
But I think, going back to what Mr. Hale said, saying we
will get to a SBR by 2014, put a search light or a flashlight
on all of the different internal processes we have, and that
has, quite frankly, illuminated a lot of problems that we did
not know existed. So as Ms. Commons said, this is a very
deliberate process and the more help we get from--the Marine
Corps audit was very important for all of us because it really
set the bar on what we have to do. So I believe that we are
doing much of what you are suggesting right now.
Senator McCaskill. Good.
Dr. Morin. Senator, can I add one more point on that topic,
if I may?
Senator McCaskill. Sure.
Dr. Morin. One of the things that we did not probably
anticipate, when we hired these independent public accounting
firms to do examinations and do limited scope looks at our
assertions, is in some cases they have come and told us we were
going further than we needed to in preparation for this
assertion. I had independent public accounting firms on two of
the assertions I have done where they identified areas where
our plans, they felt, went beyond the standards that were
required. Now, other areas they said, even though they gave us
favorable opinions, there are other areas for improvement. But
in certain cases they said, you are moving towards doing a full
financial system certification for a particular system, and
that is not a system of record and you probably do not need to
go to the expense of doing that. So there is return in having
these outside eyes on the problem that goes beyond just working
through the process. Sometimes that external commercial audit
perspective tells us we are making the problem harder than it
had to be.
Senator McCaskill. I am sure all the outside audit firms
that are watching this hearing, glued to whatever place, are
very grateful to you right now because I summarily dismissed
how expensive they were, I think you were pointing out that
there can be value added is important.
I only have two more questions and then we will submit some
more to you for the record. I will note that Senator Manchin
had more contractor-related questions that we will submit. I
will not go into them now, but I think they are important.
Obviously, I think all of you know how engaged I am in the
contracting issue. But he wants to know about the costs of
benefits to veterans versus the overseas contractors, and I
will make sure that those get in the record for his answer on
that.
Let's talk about DEAMS for a minute at the Air Force. In
February, GAO reported that the interfaces on DEAMS and the
legacy systems at the Air Force were inoperable and required
reports either that are not being produced or that are
inaccurate or incomplete. The interface problem with the
Standard Procurement System (SPS) became so serious that that
interface was turned off and the data was manually entered into
DEAMS. In an April 2011 survey, 48 percent of the DEAMS users
said their workload has increased as a result of DEAMS and only
10 percent felt that their work was more accurate. Clearly that
is not a good outcome for this system since we have spent 8
years and $330 million on it.
What is your response to these problems that have been so
recently pointed out? I would like Mr. Khan to also speak to
that.
Dr. Morin. Yes, ma'am. Now, it is important to note the GAO
study was just published a couple of months ago, but it was a
result of field work that occurred predominantly in the last
calendar year, some of it early in that year. So there has been
significant progress since then.
Let me begin with the interface issue. You referred to the
SPS interface, and it is a portion of that interface which does
not work. We are successfully importing data from the standard
procurement interface, which is one of our main basic
contracting systems, for new contracts. Modifications of
existing contracts are the part that do not come through. So 95
percent of the new contracts come through fine. For the
modified contracts, the majority need to be handled manually.
That is among the 245 areas that were identified for
improvement in the course of moving towards stabilization of
the system ahead of the operational assessment that I referred
to in testimony earlier. There are some inherent limitations in
working with an old system like SPS, and that is a system that
has been looked at for replacement for some time and has been
frozen and in place for a while, which is a problem. We believe
that with the bulk of the new contracts coming in successfully
and with some process improvements, we can get to an acceptable
level of performance there.
On the workload piece, if staff were promised that DEAMS
would yield a lightening in their workload, that was not a good
promise to make. ERPs in general are not workload savers and
they should not be sold that way in comparison to the legacy
systems which we have in a lot of the DOD which are quite easy
to use. They are quite easy to use in some cases because they
do not have appropriate internal controls. So doing the work
properly sometimes takes more effort. Directly linking
obligations to specific contracts and tying that through to a
receiving report requires work.
So I do not want to overpromise here. There are areas where
we can improve workload. Again, we had laid in 245 specific
discrepancies we were seeking to resolve as we worked through
to stabilization of DEAMS. We have addressed all but about 40
of those. The remaining 40 we anticipate being closed out by
the second week of May, so within a month. That will be when we
move into the operational assessment of that system at Scott
Air Force Base. We take the workload piece seriously, but we do
not anticipate fielding a system that is going to make
everyone's life much easier because we are fielding a rigorous
system.
Senator McCaskill. I really understand the point you are
making because I think one of the reasons we got into this mess
is everybody wanted to hold onto legacy systems. So every time
they were asked, it was, oh, no, this is horrible. It is just
way too much work. So there was this cultural predisposition
towards holding onto legacy systems which frankly has caused a
lot of the interface problems and a lot of the time slippage
and a lot of the budget overruns and so forth.
Would you agree with the description that Secretary Morin
made, Mr. Khan, that they are getting there?
Mr. Khan. We would have to go back and evaluate that.
Part of the issue is also related to what I mentioned
earlier about data standardization. That was the problem, why
SPS was not communicating properly with DEAMS. That is an
issue.
The other one goes to some of the features which the users
of DEAMS had in the legacy systems are not in the newer system.
So it is like Dr. Morin is saying, it is managing the
expectations that in some of the cases workload is not going to
lighten up for the users. But this is also linked up with the
business process reengineering effort which is a part of the
NDAA. If that is followed through, the expectation is that the
processes are going to be much more streamlined than they were
in the legacy environment. So ideally that is going to lighten
the workload.
Senator McCaskill. Finally, the auditability of Army
classified programs. Earlier this year, the Army was asked to
reprogram funds for a variant of the GFEBS that will be able to
handle its classified programs. Without this new system, the
Army said it would not be able to achieve full auditability of
its SBR by the 2014 deadline set by Secretary Panetta. The
reprogramming request was recently withdrawn largely because it
did not meet Senator McCain's criteria for approval of a new
start reprogramming request.
I would like you to state for the record what the impact of
a withdrawal of the GFEBS Sensitive Activities reprogramming
request on the Army's ability to meet the deadline is, and what
steps, if any, would you like Congress to take in the 2013
authorization and appropriations legislation to address this
issue?
Mr. Westphal. Madam Chair, as I understand it, if we are
able to get the resources in fiscal year 2013, we will be able
to fix this issue. We have asked for the reprogramming, and
Senator McCain, as you pointed out, has asked us to put our
report together on that and we are producing that.
Senator McCaskill. Okay. If you would let us know and make
sure that we get what you need in the authorization, as it
relates to that, I think it is very important that the
classified programs have that auditability, and I do not want
to leave them behind. So let us know on that.
As usual, you all are working very hard at a very difficult
problem. I get very frustrated with the amount of money that
has been spent and the amount of time it has taken. But please
do not lose sight that I do understand that it is incredibly
complicated what you are trying to do. There are no businesses
that have the challenges that you have in terms of enterprise-
wide auditability.
I am not going to let up on this because I think it is
essential that we get to that point. I will be watching. I feel
like ordering my buttered popcorn and Diet Coke to watch this
2014 date because I think this is going to be very interesting
to see how this turns out. I do think everybody is on point
about it. I think everybody is working very hard towards the
goal. I will be paying very close attention to how much money
it costs us to get to this 2014 number. I will look forward to
whatever assessment you think you can give us, Secretary Hale,
about manual work-arounds and what the price tag on that is
going to be so that I could have a conversation with both you
and Secretary Panetta to make sure that we have done the cost-
benefit analysis.
I think pushing everybody has a lot of benefit. I just want
to make sure the costs associated with that benefit are not too
high. I would appreciate any feedback we can get specifically
on that in the coming weeks and months.
As usual, thank you very much for all of your service. The
public has no idea how much you know and how hard you work. I
do. Thank you very much. This hearing is adjourned.
[Questions for the record with answers supplied follow:]
Questions Submitted by Senator Claire McCaskill
PROBLEMS WITH FUNDS BALANCE WITH TREASURY
1. Senator McCaskill. Secretary Hale, Ms. McGrath, Secretary Work,
and Secretary Commons, the Department of Defense (DOD) identified the
reconciliation of its Funds Balance with Treasury (FBWT) as the first
and easiest step that it could take toward auditability. In November
2010, however, the DOD Inspector General (IG) issued a disclaimer of
opinion on the Navy's fiscal year 2010 FBWT. The Government
Accountability Office (GAO) reviewed the audit findings and concluded
that although DOD has spent over 4 years and $29 million to acquire an
information technology tool to reconcile FBWT, this tool won't be able
to get the job done until DOD takes additional steps to fix internal
controls. For example, GAO found that the Navy relies on data from the
Defense Cash Accountability System (DCAS) to reconcile their FBWT to
Treasury's records, however, ``DOD has not tested the application
controls over DCAS since its implementation to determine if the system
is processing data as intended''. ``A list of over 650 DCAS system
change requests'' needs to be addressed ``in order to correct DCAS data
reliability and security problems or process required system updates'';
and ``over 200 of these system change requests are deficiencies that
affect audit readiness and 20 require immediate action.'' Have the
problems identified by the DOD IG and GAO been addressed?
Mr. Hale and Ms. McGrath. In its 2011 report on Navy and Marine
Corps FBWT reconciliation, GAO noted that Defense Finance and
Accounting Service (DFAS) has been developing a Business Activity
Monitoring (BAM) tool. The tool is an essential component in successful
and repeatable Department of the Navy FBWT reconciliation. This year,
DFAS has loaded the Navy appropriation data for fiscal year 2010
through fiscal year 2012 and has completed monthly FBWT reconciliations
for the first 4 months of fiscal year 2012. DFAS is also retaining all
supporting documentation for audit purposes. Further strengthening of
the BAM tool's internal controls is planned for third quarter of fiscal
year 2012, along with the loading of the Navy appropriations data from
fiscal year 2006 to 2009. Other improvements are also planned. DFAS
expects the BAM tool to fully support the Navy FBWT reconciliation by
the scheduled audit readiness date of March 2013.
These 650 System Change Requests (SCR) GAO noted related to DCAS
are not solely system deficiencies related to cash accountability
reporting, but a combination of audit-related weaknesses, user
enhancements, and other changes to systems functionality requested by
both technical and functional experts. DOD has developed a two-step
improvement plan to address the system change requests. First, DOD is
currently migrating the systems platform that DCAS operates in, moving
it to a web-based, Common Access Card enabled environment. This
migration will complete approximately 100 of the SCRs. Second, the DCAS
governance board, comprised of executive level personnel, will review
and reprioritize all remaining SCRs after the systems migration. This
board will be held accountable for ensuring that the scarce resources
allotted to DCAS are used wisely with emphasis on ensuring auditability
of the cash accountability reporting.
Mr. Work and Ms. Commons. The Navy does rely on the data from the
DCAS to reconcile the FBWT to Treasury's records. DCAS is managed and
maintained by the Defense Logistics Agency (DLA). DLA is addressing the
concerns noted by GAO, with plans to move DCAS to a more secure web
environment, and with a planned November 2012 deployment of multiple
systems change requests to enable Navy-Marine Corps SBR audit
readiness.
In their 2011 report on Navy and Marine Corps FBWT reconciliation,
GAO also noted that the DFAS has been developing a BAM tool. This
information technology tool is essential to successful and repeatable
Navy FBWT reconciliation. This year, DFAS has loaded Navy data for
fiscal year 2010 through fiscal year 2012 appropriations and has
completed monthly FBWT reconciliations for the first 4 months of fiscal
year 2012. DFAS expects to be current with the monthly reconciliations
from October 2011 going forward by the end of May 2012. For audit
purposes, DFAS is also retaining all documentation supporting the
monthly reconciliations. Further strengthening of the BAM tool's
internal controls is planned for third quarter of fiscal year 2012.
DFAS expects the BAM tool to fully support the Navy FBWT reconciliation
by the scheduled audit readiness date of March 2013.
2. Senator McCaskill. Secretary Hale, Ms. McGrath, Secretary Work,
and Secretary Commons, why is it that the DCAS problem does not appear
to have adversely affected other DOD entities that submitted their FBWT
for audit?
Mr. Hale. The current 2014 directive for auditability will require
all entities to reconcile FBWT, regardless of system in use. Only a few
entities to include the Navy currently use DCAS for U.S. Treasury
expenditure reporting and FBWT reconciliation. DOD is working closely
with the U.S. Treasury in conjunction with the Government Wide
Accounting reporting modernization effort to ensure all of our systems
that affect the FBWT reconciliation are properly aligned and auditable.
Ms. McGrath. The DCAS capabilities affect other entities and the
solutions being implemented will improve the processes for all impacted
entities.
Mr. Work and Ms. Commons. The Navy is the only DOD organization
using DCAS for cash accountability and Treasury reporting.
3. Senator McCaskill. Secretary Hale, Ms. McGrath, Secretary Work,
and Secretary Commons, is the Navy now in a position to receive a clean
audit opinion on its FBWT?
Mr. Hale and Ms. McGrath. Navy has established a plan to assert
audit readiness for FBWT by March 31, 2013. We are monitoring Navy's
progress against their plan.
Mr. Work and Ms. Commons. The Navy's FBWT audit readiness assertion
date is planned for March 31, 2013. The Navy is not yet audit ready.
The Navy is collaborating with the DFAS to execute its detailed plan to
achieve audit readiness in this area. The Navy has financial managers
on-site at DFAS Cleveland working closely with DFAS managers to keep
the detailed FBWT auditability plan on schedule.
______
Questions Submitted by Senator Joseph Manchin III
OVERSIGHT OF CONTRACTING
4. Senator Manchin. Secretary Hale, we must look closely at the
business practices of contracting since contracted spending accounted
for over half of the DOD budget in fiscal year 2011. In your response
to my question regarding the ratio of contractors to uniformed
personnel, and the jobs performed by contractors in overseas
operations, you stated, ``I don't think any contractor is doing exactly
the same job as a frontline soldier.''
However, I maintain that contractors are performing many jobs that
our servicemembers have been trained to do, and at a higher cost. From
what I understand, contractors eat at the same dining facilities, see
the same doctors, and are resupplied by the same convoys that support
our troops. There are also long-term costs associated with contractors,
especially in cases like Qarmat Ali where the taxpayers may foot the
bill because of the indemnity clause that relieves the contractor of
responsibilities even under willful misconduct conditions.
As you may know, the Corps of Engineers contracts for security in
both Afghanistan and Iraq. According to a 2011 Special Inspector
General for Iraq Reconstruction report, in May 2004 the Army awarded a
services contract to the Aegis Corporation for security management
services, protective services, and antiterrorism support and analyses
in Iraq. The contract was for a 1-year base period--June 1, 2004
through May 31, 2005--and two 1-year options--June 1, 2005 through May
31, 2007. The two 1-year options were exercised, and the second option
year was extended for 6 months to November 30, 2007. As of April 7,
2011, obligations totaled $447.5 million, and Aegis had received $445.5
million.
Similar jobs go well beyond security and frontline soldier
missions. For example, according to a 2009 CBS report, Kellogg, Brown,
and Root (KBR) was found to charge $100 per load of laundry. Yet, we
have Quartermaster Corps soldiers trained to operate shower and laundry
equipment. Further, the Laundry Advance System, which is a mobile
laundry trailer, is capable of supporting large military units.
With that in mind, below is a sampling of jobs being performed by
contractors doing the same job as a military servicemember in
Afghanistan. Please provide a comparison in salaries of the following
positions:
Contracted Position Military Position
FLUOR Security Manager (Afghanistan)--U.S. Marine MOS 0311
SABRE International Security Manager--U.S. Army 11B30
Dyncorp Detainee Expert--U.S. Army 31E20
Armor Group Security (Afghanistan)--Army 11B10/Marine 0311
Aegis Security Escort Team Leader--Army 11B20/Marine 0311
Aegis Personal Security Detail Leader--Army 11B20/Marine 0311
Aegis Kennel Master--U.S. Army MOS 31K30
Aegis EOD Dog Handler--U.S. Army MOS 31K10
Triple Canopy Security Guard (Afghanistan)--U.S. Army 11B/
Marine 0311
KBR Laundry Facility Attendant--U.S. Army MOS 57E10
KBR Laundry Facility Supervisor--U.S. Army MOS 57E30
KBR Food Service Specialist--U.S. Army MOS 92G10
KBR Food Service Specialist Supervisor--U.S. Army MOS 92G
Mr. Hale. The 2012 Defense Strategic Guidance \1\ indicates DOD is
maintaining a ready and capable force even as it reduces the size of
the military. We are focused on sustaining the military's warfighting
capabilities. This strategy entails leveraging non-military personnel
for the support activities associated with combat, including the types
of support services listed in your question as well as reconstruction
activity, which is non-military in nature. The use of contractors in
these support activities has been a feature in every war or contingency
operation in our history. As the 2010 Quadrennial Defense Review
(QDR)\2\ acknowledged, contractors are part of the total force,
providing an adaptable mix of unique skill sets, local knowledge, and
flexibility that a strictly military force cannot cultivate or resource
for all scenarios. This is true even for contractor-provided
security.\3\ More broadly, contractors provide a range of supplies,
services, and critical logistics support in many capability areas,
while reducing military footprint and increasing the availability and
readiness of resources.
---------------------------------------------------------------------------
\1\ Available at http://www.defense.gov/news/Defense--Strategic--
Guidance.pdf
\2\ Available at http://www.defense.gov/qdr/
\3\ These security providers provide self defense against criminal
violence, not deliberate destructive action against armed forces or
armed actors. In many cases, using soldiers to protect non-military
personnel or reconstruction activities could turn civilian development
into a military target.
---------------------------------------------------------------------------
We are in the process of assembling the requested data, but caution
that a direct comparison between the contracted cost for an individual
and the salary of a military position poses challenges. For example, a
soldier's annual salary does not reflect the life-cycle costs to
recruit, train, retain, and retire the individual; and a contractor's
annual salary does not capture the fact that this work-for-hire
resource comes pre-recruited and pre-trained and can be flexibly
engaged and released. In 2009, the Chairman of the Joint Chiefs of
Staff commissioned a task force to assess DOD's reliance on contracted
support in contingency operations and provide recommendations to
improve our ability to plan for and execute operational contract
support. As a result, the Chairman, with great support from the
Secretary of Defense, has directed a number of efforts to
institutionalize this capability. These ongoing efforts include, but
are not limited to, improvement to strategic planning guidance,
doctrine, education, and resources. GAO is currently evaluating DOD's
efforts in this area under job number 351692.
DOD agrees that it must continuously look closely at the business
practices of contracting, particularly in support of frontline
soldiers. We have been working with Senator McCaskill, who chairs this
subcommittee, and others on improving wartime contracting efforts. In
recent years, we supported the 2008 to 2011 Wartime Commission that
Senators McCaskill and Webb established, providing the Commission with
personnel, data, interviews, and insights. The Commission issued three
major reports containing many recommendations. We maintain a scorecard
to manage DOD progress against all the Commission's recommendations. We
currently are working with GAO, which is engaged under job number
121042 in evaluating DOD's progress against the Commission's
recommendations. We are also working with Senator McCaskill's Senate
Homeland Security and Governmental Affairs Committee Contracting
Oversight Subcommittee staff on the language of her proposed
Comprehensive Contingency Contracting Reform Act of 2012 (S. 2139). The
provisions are far-reaching and include coverage related to topics
raised in your question: contracting for security and base operations
support services, which are obtained through omnibus contracts, like
the Logistics Civil Augmentation Program.
5. Senator Manchin. Secretary Hale, as a follow-up to your
testimony regarding the mix of contractors to military personnel,
according to the public website for the Defense Contract Audit Agency
(DCAA), the agency that provides standardized contract audit services
for DOD, as well as accounting and financial advisory services
regarding contracts and subcontracts, there resides an inherent
skillset within DOD for oversight of contracts. There are 4,172
auditors within DOD, and a total staff of nearly 5,000 in DCAA. Nearly
all of these employees have college degrees (4,399), advanced degrees
(1,424), or are Certified Public Accountants (1,216). Beyond the
organic audit functions performed within DOD, could you further provide
the number and type of contractors that DOD intends to employ to
perform an audit?
Mr. Hale. While contract audits are an inherently governmental
function, financial statement auditing is not. Financial statement
audits are different than contract audits, and require a different
skillset. Our estimate of the number and type of contractors that DOD
intends to employ to perform financial statement audits is contract
sensitive. However, significant financial statement audits that have
been performed, such as the U.S. Army Corps of Engineers and the U.S.
Marine Corps audits, have involved approximately 100 auditors.
6. Senator Manchin. Secretary Hale, how long do you anticipate
hiring these contractors to perform audit functions?
Mr. Hale. Since financial statement audits are not an inherently
governmental function and they require specialized skills and
experience, we believe it is most efficient and effective to use
contractors to perform this function indefinitely. It should be noted
that this is a common practice across government, and that independent
public accountants' work is frequently subject to review by government
auditors such as the DOD IG and GAO.
7. Senator Manchin. Secretary Hale, in your testimony you stated,
``our contractor dollars from 2012 to 2013 go down in similar levels to
our civilian workforce and our military workforce. So, you are seeing
some downturn in contractors.'' Can you provide me the details behind
your statement, to include the details on the number of contractors in
2012 and 2013?
Mr. Hale. As reflected in the fiscal year 2013 President's budget
request, overall contract services funding decreases by $3.9 billion (3
percent) from fiscal year 2012 level of $136 billion to the fiscal year
2013 level of $132 billion. The primary reason for this decrease in
contractor support ($2.4 billion) is the reduction in staff support
contract services, one of our targeted fiscal year 2012 efficiencies.
Advisory and Assistance and Other Services decrease by 10.2 percent
from the fiscal year 2012 budget, largely attributable to reductions in
support to the Army, the Defense Intelligence Agency and other
classified programs. These are the object classes that would contain
the majority of staff-support contractor functions; however, some of
the specific staff-support contracts may be reflected against other
object classes. A process to measure actual progress against the
Secretary's reduction goal has been implemented. Although overall
contract services funding is estimated to decrease by 3 percent in
fiscal year 2013, the fiscal year 2013 contractor full-time equivalent
(FTE) levels are estimated to increase by 6 percent from 290,133 to
308,532--with the largest increases in the less costly skill set of
equipment maintenance.
______
Questions Submitted by Senator Kelly Ayotte
SEQUESTRATION
8. Senator Ayotte. Secretary Westphal, Secretary Matiella,
Secretary Work, Secretary Commons, Secretary Morin, and Mr. Tillotson,
as the Chief Management Officers (CMO) and Chief Financial Officers,
each of you enjoys unique visibility across the breadth of your
respective Services' financial and management operations. Under current
law, the defense sequestration cuts are due to be implemented in
January. Including the existing $487 billion in cuts over the next 9
years, defense sequestration would result in an approximately $1
trillion reduction in defense spending over the next decade. Secretary
Panetta has said the defense sequestration cuts would be catastrophic
and would inflict severe damage to our national defense for
generations. He compared the defense sequestration cuts to shooting
ourselves in the head. From a budget and management perspective, what
impact will defense sequestration have on your Service?
Mr. Westphal and Ms. Matiella. To echo Secretary Panetta, the
magnitude of these cuts would be catastrophic. Sequestration would
force an immediate percentage reduction in our operation and
maintenance accounts that could damage readiness, for example through
reduced training, and make our ability to cover any emergent execution
year requirements extremely difficult. The reductions could also affect
ongoing efforts to improve our infrastructure and could desynchronize
our investment and modernization strategies.
While recognizing the Nation's deficit challenges, it is imperative
that any future reductions as a result of reduced discretionary
spending caps to the Army's budget be based on comprehensive strategic
analysis. We must ensure that we preclude hollowing the Army by
maintaining balance in force structure, readiness, modernization
efforts, and commitments to the All-Volunteer Force.
Mr. Work and Ms. Commons. Any planning for sequestration would be a
government-wide effort guided by the Office of Management and Budget
(OMB). If sequestration occurs, automatic percentage cuts are required
to be applied without regard to strategy, importance, or priorities,
resulting in adverse impact to almost every contract and operation
within DOD. Sequestration would adversely impact all components of the
fiscal year 2013 budget request through contract cancellations,
contract terminations, undetermined cost increases caused by
inefficient contracting, and schedule delays.
Dr. Morin and Mr. Tillotson. Per guidance from OMB, DOD is not
planning for sequestration; however, sequestration would drive major
additional reductions beyond the first phase of the Budget Control Act
(BCA) reductions to the Air Force fiscal year 2013 budget request. We
concur with Secretary Panetta's assessment. As Air Force leadership has
testified, the proposed fiscal year 2013 budget is a balanced and
complete package with no margin of error. Under sequestration,
additional programs would need to be restructured, reduced and/or
terminated. Our readiness and operations would be impacted, as well as
all investment accounts, including our high-priority modernization
efforts.
YEAR-END FUNDS TRANSFERS
9. Senator Ayotte. Secretary Hale, as I said in my opening
statement, I am concerned that the annual transfer of funds between
defense accounts, especially at the end of the fiscal year, decreases
accountability and increases the difficulty in achieving accurate
financial statements. These requests are supposed to be for higher
priority items based on unforeseen military requirements. How do you
ensure that funds-transfers, including those that are below the
threshold needed for congressional approval, are, in fact, being spent
on higher-priority items based on unforeseen military requirements?
Mr. Hale. I believe that the current reprogramming process provides
DOD with necessary flexibility while providing Congress with
appropriate oversight. DOD prepares the budget 18 to 20 months prior to
actual execution, the reprogramming process permits DOD to meet most
emerging requirements in a timely manner while staying under the
Transfer Authority limits. I have personally conveyed your concerns and
those of other committees to my staff and to the senior staff in the
military departments.
10. Senator Ayotte. Secretary Hale, do you agree that the
persistent transfer of funds among accounts without oversight,
particularly at the end of the fiscal year, makes the prospect of an
accurate financial statement that much more difficult to obtain? If so,
what are you doing to curtail these transfers and end-of-year spending
sprees?
Mr. Hale. I believe that the current reprogramming process provides
DOD with necessary flexibility while providing Congress with
appropriate oversight. The reprogramming process provides critical
support enabling DOD to respond to emerging needs and to make effective
use of taypayers' dollars. The process is especially important when we
are at war. I have personally conveyed your concerns and those of other
committees to my staff and to the senior staff in the military
departments. We will seek to minimize reprogrammings, but we need your
help to create a process that continues to meet warfighters' needs.
BASE OPERATING BUDGETS
11. Senator Ayotte. Secretary Hale, the Services historically
propose annual budgets that contain an amount for base operating
support that is significantly less than the known requirements. They
know that they will have the flexibility to transfer funds into the
account to cover bills during the year. But this practice results in a
budget that does not reflect reality. How can we change this process to
ensure the budget proposals reviewed by Congress are an accurate
accounting of what we expect to pay?
Mr. Hale. A number of factors have challenged the Services' efforts
in recent years to predict and budget for Base Operations Support (BOS)
costs. Utilities costs across all commodities (i.e., electricity, fuel
oil, natural gas, and coal) are rising at a faster rate than previously
experienced. Soldier and family support programs related to transition
assistance, suicide prevention, and sexual harassment and assault have
expanded to meet the evolving needs of our warfighters and their
families. The fidelity of the Services' BOS budget proposals will
improve over time as cost estimating models are updated to reflect
recent trends in utilities costs and the impact that the redeployment
of personnel from Afghanistan will have on BOS programs and costs has
been fully assessed.
12. Senator Ayotte. Secretary Hale, if we have predictability
regarding certain budget expenses, why are these accounts not
completely funded in DOD's budget requests?
Mr. Hale. The Services can accurately predict the costs of certain
BOS programs. These include traditional family programs such as child
care and youth programs, law enforcement and force protection, fire
protection, leases, long-term utilities privatization contracts, and
civilian salaries. These fixed costs represent more than 80 percent of
the total BOS requirements and are fully funded each year. As mentioned
in the response to Question #11, there have been unfunded requirements
in recent years due in part to the growth in specialized soldier and
family support programs and utilities bills that are not tied to fixed
rates.
MAJOR WEAPONS SYSTEMS COSTS
13. Senator Ayotte. Secretary Hale, after the defense budget cuts
of the early 1990s, we saw significant growth in the unit costs of
major systems as their procurement quantities were reduced and their
acquisition schedules were stretched out. We are now facing a similar
scenario where--through sequestration--the BCA will significantly cut
the defense budget. Has DOD looked at how the drawdown during the 1990s
impacted the costs of major weapons systems?
Mr. Hale. If sequestration takes effect early next year,
significant inefficiencies and impediments to prudent acquisition
program management and financing will be introduced. The requirement
that each program, project, and activity take a reduction will
introduce serious management challenges for program managers. DOD does
not have the data on the cost impact of the previous drawdown.
14. Senator Ayotte. Secretary Hale, is DOD doing any similar
analysis today as it plans its budgets for the out-years? If not, why
not?
Mr. Hale. DOD prepares the annual budget request within the
framework of the Planning, Programming, Budgeting, and Execution system
process. The Secretary of Defense has noted that additional reductions
in resources will require a revised strategy and will prepare a budget
that includes the out-years.
15. Senator Ayotte. Secretary Hale, to what extent could cost
savings from these reductions be eaten up over the long-term by higher
per-unit costs and termination costs?
Mr. Hale. Procuring defense articles at economic rates often yields
savings, in comparison to procurement actions where vendors are unable
to take advantage of economies of scale production. Likewise,
terminating or cancelling procurement in advance of what was
contracted, typically results in additional costs to the government, to
prematurely closeout production. DOD customarily seeks to maximize its
spending by buying at economic rates. However, when the funding is
constrained and the resources are allocated over a wide portfolio of
defense missions, maintaining efficient rates and keeping production
lines open become challenging.
Once DOD has been notified by OMB as to the annual budget level,
DOD will carefully examine investment strategies and alternatives to
address the full spectrum of national security requirements by crafting
a balanced budget plan to minimize inefficiencies as a result of lower
funding levels.
BUDGET EFFICIENCIES
16. Senator Ayotte. Secretary Hale, in January 2011, DOD announced
that it had found $154 billion in efficiencies over the next 5 years
and that it would be able to invest $70 billion of that saved money
into more deserving accounts. Those efficiencies included scores of
initiatives, including program cancellations and restructuring,
consolidations in various facilities and functional areas, reductions
to DOD's workforce, and cuts to the number of flag and general officers
and senior executive personnel. Where in its overall plan of action and
milestones is DOD in implementing these efficiency initiatives?
Mr. Hale. DOD has established governance processes and reporting
mechanisms to manage implementation of the 300+ efficiency initiatives.
The Services and the Office of the Secretary of Defense (OSD) are on
target to successfully implement their President's budget for 2012
efficiencies. On April 23, 2012, the Services briefed the Senate
Appropriations Committee and Senate Armed Services Committee staffs on
their fiscal year 2012 Secretary of Defense efficiency initiatives,
explaining the key focus areas in which they intended to gain
efficiencies, the implementation process, and assessment of risk.
Due to enactment of the BCA of 2011, many of the reinvestments
included in the fiscal year 2012 President's budget request have been
offset by major force structure changes and other reductions in the
fiscal year 2013 budget.
17. Senator Ayotte. Secretary Hale, to what extent is DOD actually
realizing the intended savings?
Mr. Hale. Senior leadership within DOD routinely monitor execution
of these efficiencies to ensure that intended savings are realized. As
of the March 19, 2012, briefing to the Deputy Secretary of Defense, the
Services and OSD are on target to successfully implement their
President's budget for 2012 efficiencies. In addition, the Services
briefed the Senate Appropriations Committee and the Senate Armed
Services Committee staffs on April 23, 2012, assuring the staffs that
they are on track to meet their fiscal year 2012 efficiency targets.
18. Senator Ayotte. Secretary Hale, without the ability to audit
DOD's Statement of Budgetary Resources (SBR), how do we actually know
we are saving this money?
Mr. Hale. Although the overall DOD SBR is not yet auditable, each
component annually certifies its own financial reports. These
individual, component-level accounting systems provide the execution
information utilized in each component's efficiency governance and
reporting process. In March 2012, all the Services and OSD reported on
track execution of their efficiencies.
19. Senator Ayotte. Mr. Khan, do you have any concerns that the
quality of DOD's financial management data, business processes, and
business systems may not be conducive to fully achieving these intended
savings?
Mr. Khan. As we have reported, DOD does not yet have accurate and
reliable financial data needed to effectively carry out its management
functions, including identifying and managing the costs of its
operations, and reliably estimating resource needs. We have also
reported that weaknesses in DOD's business processes and systems
contribute to the lack of reliable financial data. In estimating
reported cost savings, we would expect that DOD would have to rely to
some extent on historical financial management data as well as program
performance information to identify areas where potential efficiencies
and related cost savings could be achieved. To track its progress in
achieving these savings, we would expect that DOD would need to rely on
information in its accounting systems as well. Therefore, until DOD
corrects the weaknesses in its accounting and other business processes
and systems so that it is able to produce reliable financial data for
its cost savings efforts, any reported cost savings will not be
reliable.
20. Senator Ayotte. Secretary Hale, of the $100 billion in savings,
the plan was to let the Services use about $28 billion to cope with
higher-than-expected operating expenses and $70 billion for high-
priority weapons systems. To what extent have these monies been
reinvested as intended?
Mr. Hale. Due to enactment of the BCA of 2011, many of the
reinvestments included in the fiscal year 2012 President's budget
request have been offset by major force structure changes and other
reductions in the fiscal year 2013 budget.
CONTRACTOR PENSION LIABILITIES
21. Senator Ayotte. Secretary Hale, a few months ago, Senator
McCaskill and I, and subsequently Chairman Levin and Ranking Member
McCain, asked GAO to look into the issue of defense contractor unfunded
pension liability. Due to a change in Federal accounting rules that
would accelerate the amount contractors can recover from DOD for their
employee pension costs, DOD may have to pay billions of dollars more
for weapons programs than originally planned. To what extent has DOD
budgeted for these pension liabilities?
Mr. Hale. DOD did not budget for the increased pension costs
resulting from the rule revision in the fiscal year 2013 President's
budget submission.
22. Senator Ayotte. Secretary Hale, what will DOD's approach be
going forward to properly budget for these liabilities?
Mr. Hale. The Director, Defense Pricing has issued guidance stating
that all contracts entered into after February 27, 2012, should
properly reflect contractor pension costs calculated under the newly
revised Cost Accounting Standards. We will continue to work with the
Office of Defense Pricing to ensure that these costs are properly
captured in future budget submissions.
23. Senator Ayotte. Secretary Hale, how concerned are you about
this issue today?
Mr. Hale. We are concerned that the recent change to the Cost
Accounting Standards will result in higher pension costs to DOD in the
near-term. It is unfortunate that these higher costs are coming at a
time when DOD is working hard to identify ways to efficiently reduce
spending. However, we recognize that this will not likely be a
permanent cost increase to DOD. As contractors' pensions become fully
funded, DOD's reimbursement costs should revert to historically normal
levels.
24. Senator Ayotte. Secretary Hale, according to the 10-K
Securities and Exchange Commission reports that the four top defense
contractors recently filed, the difference between their pension plan
assets and future pension liabilities range from $2.9 billion to $13.5
billion each. At this point, what is your sense of roughly how much
these liabilities could cost DOD?
Mr. Hale. These costs will be spread over all entities that do
business with these companies. The amount that those liabilities could
cost DOD depends on the amount of work DOD does with those contractors
relative to other agencies and customers. Even under the old Federal
accounting rules, DOD would have had to pay its share of those
liabilities. The real cost to DOD from the new rules is the timing of
cost--those liabilities will be recuperated much faster under the new
rules, resulting in a cost increase in the near-term. DOD is currently
working closely with our contractors to estimate DOD's cost for our
next budget submission.
AIR FORCE AUDITABILITY
25. Senator Ayotte. Secretary Morin, Mr. Tillotson, and Mr. Khan, I
understand that, among all the Services, the Air Force may have the
most difficulty meeting Secretary Panetta's accelerated goal of 2014,
as opposed to 2017, to achieve auditability of its SBR. What are the
most significant challenges facing the Air Force in this regard and how
is the Air Force addressing them?
Dr. Morin and Mr. Tillotson. The most significant challenge facing
the Air Force is the lack of a single integrated financial management
system. Financial data flows through multiple systems before it is
posted to our general ledger. This creates opportunities for data to be
lost or otherwise degraded. To address this problem, the Air Force
began implementing an Oracle-based COTS package widely used in the
Federal Government. The resulting system, Defense Enterprise Accounting
and Management System (DEAMS), is a joint effort with U.S.
Transportation Command (TRANSCOM), DFAS, and the U.S. Air Force. DEAMS
will not be fully deployed prior to the 2014 date. To address this
shortfall, the Air Force and DFAS are evaluating additional process
controls and cost-effective enhancements to legacy systems to achieve
the accelerated goal. The ability to meet the 2014 goal will also
require increased manpower to support additional anticipated testing of
data and controls.
Mr. Khan. As part of the May 2012 Financial Improvement and Audit
Readiness (FIAR) Plan Status Report, the Air Force reports accelerating
audit readiness milestones for each of its SBR assessable units and its
planned strategy for meeting those milestones. However, the Air Force
may face challenges similar to those for the Marine Corps' initial SBR
audit experience that it must overcome if it is to meet the 2014 audit
readiness date for its SBR. These challenges include the ability to
produce supporting documentation for individual transactions;
reconciling data between different systems such as military pay and
personnel systems; ensuring that it can identify complete populations
of transactions for activities such as civilian pay; and ensuring that
its personnel are adequately trained to carry out key internal controls
and other activities necessary for an audit. According to the Air
Force, it will require additional contractor and auditing expertise to
meet these accelerated milestones.
Another challenge involves the lack of effective automated
information systems such as Enterprise Resource Planning (ERP) systems.
In the May 2012 FIAR Plan Status Report, the Air Force reported that it
will need to rely on manual controls and legacy system enhancements to
meet the SBR audit readiness goal. Reliance on manual controls and
legacy systems to produce financial management information for
reporting results will necessitate more time-consuming, extensive
testing, the collection of more supporting documentation, and the
reconciliation of data maintained in the numerous legacy systems, not
only in Air Force systems, but also in those under the control of the
DFAS.
26. Senator Ayotte. Secretary Morin, Mr. Tillotson, and Mr. Khan,
how confident are you that the Air Force will make the 2014 goal in a
way that is repeatable and that will, in fact, ensure that the Air
Force has the reliable data and efficient business processes it needs
to support major financial management decisionmaking?
Dr. Morin and Mr. Tillotson. We are confident that the Air Force is
making the necessary changes to improve business processes and enhance
data reliability to support major financial management decisionmaking.
We have implemented additional reconciliations and controls in our
funds distribution and reimbursable authority business processes,
clarified guidance related to asset accountability, and are deploying
an automated time and attendance system for our civilian employees. We
have a disciplined review process and anticipate identifying and
implementing additional corrective actions required to meet the 2014
date. We continue to assess that there is moderate risk involved in
meeting the deadline, primarily due to systems deficiencies that we are
working to remedy.
Mr. Khan. It is unclear at this time whether the Air Force can meet
the 2014 audit readiness goal of enabling an effective and efficient
audit and timely audit opinion. The recent experiences of the Marine
Corps in its efforts to have its SBR audited demonstrate the kinds of
difficulties that the Air Force might also encounter, such as the
inability to provide supporting documentation for its transactions and
beginning balances. Given the significant change in the deadline for
the Air Force and the relatively short time to develop and implement
new plans to meet the new goal of 2014 along with its existing systems'
limitations, it is likely that the Air Force will rely on labor-
intensive, error-prone manual workarounds and other extraordinary
efforts if it is to achieve the 2014 goal. Such extraordinary, stop-gap
measures are unlikely to address the root causes of the Air Force's
financial data deficiencies, thereby increasing the risk of not being
able to repeat any success achieved in 2014.
AUDITABILITY OF ARMY PAY RECORDS
27. Senator Ayotte. Secretary Westphal and Secretary Matiella, a
few weeks ago, GAO issued a report that indicated that the Army faces
significant challenges in achieving audit readiness for its military
pay area of business. Basically, GAO found that, with its existing
procedures and systems, the Army could not effectively identify
populations of military pay records and compare military pay accounts
to personnel records. According to GAO, the Army also did not have an
efficient or effective process or system for providing supporting
documents for Army military payroll. Identifying populations of
transactions and reliably generating supporting documentation are
essential to achieving audit readiness. But, as GAO concluded, without
effective processes related to military pay, the Army will have
difficulty meeting DOD's 2014 audit readiness goal for the SBR. What
military pay audit readiness efforts is the Army pursuing that, if
successfully implemented, could help increase the likelihood of meeting
DOD's 2014 SBR audit readiness goal and the 2017 mandate for audit-
readiness on a complete set of DOD financial statements?
Mr. Westphal and Ms. Matiella. The Army is working with the DFAS to
develop and document an effective and repeatable process for
identifying the population of Active Duty military payroll accounts
each fiscal year. In fact, the Army and DFAS implemented a new process
in October 2011 that includes a monthly reconciliation of all detailed
military personnel pay statements to the summary financial reporting
records. This process improvement represents a significant
accomplishment that advances the Army's military personnel pay audit
readiness.
In addition, we are documenting the military personnel and payroll
business processes, identifying the key pay-related substantiating
documents and procedures for maintaining these documents. As part of
this effort, the Army and DFAS have created a matrix that outlines the
relevant substantiating documents and points of retention of those
documents for each payroll entitlement. We are also documenting
business processes and internal control activities associated with each
detailed military payroll transaction. The business process maps and
document retention criteria, which were not available during the GAO
audit, will inform the financial statement auditors of how payroll
entitlements are processed and how to obtain supporting documentation.
Finally, we are reviewing all policies governing the storage and
retention of key personnel and payroll-related documents. Specifically,
we are revising Army Regulation 600-8-104, Military Personnel
Information Management/Record, to require key personnel and pay-related
documents supporting military payroll transactions be centrally located
and retained in the servicemember's Official Military Personnel File.
These revisions will require human resource managers to periodically
review and confirm that Official Military Personnel File records in
master personnel record systems are consistent and complete to support
financial statement audit requirements. The review will ensure
policies, processes, and supporting business systems enable timely
access to substantiating documentation in a cost-effective manner.
These accomplishments and ongoing efforts will enable auditable
Army military pay business processes in support of the 2014 SBR audit
readiness deadline and the 2017 financial statement deadlines.
28. Senator Ayotte. Secretary Westphal and Secretary Matiella, to
what extent are these efforts documented sufficiently to help ensure
that they will be implemented in a timely and effective manner?
Mr. Westphal and Ms. Matiella. These efforts are extensively
documented. The Army follows the OSD-C FIAR Guidance, which requires a
detailed financial improvement plan. OSD-C reviews the Army's financial
improvement plan each month for compliance with the FIAR Guidance.
NAVY'S AND MARINE CORPS' FUND BALANCE WITH TREASURY
29. Senator Ayotte. Secretary Work and Secretary Commons, in the
Federal Government, an agency's FBWT account is like a corporate bank
account. But instead of a cash balance, the FBWT represents unexpended
spending authority in appropriations. So, the FBWT account basically
reflects how much budget spending authority is available to DOD and is,
for this reason, important to funds control. Because in this regard the
FBWT supports the SBR, it must be ready for audit by the end of 2014
for the SBR to be auditable in compliance with the Secretary of
Defense's October 2011 direction. I understand DOD's components have to
reconcile their FBWT records periodically, to provide an adequate audit
trail and resolve any differences. Reconciliation is vital for
maintaining the accuracy and reliability of the component's FBWT
records. But, late last year, GAO found numerous deficiencies in the
FBWT processes at the Navy and the Marine Corps that impair their
ability to perform these FBWT reconciliations. In what ways are the
Navy's and Marine Corps' existing FBWT policies and procedures
inadequate?
Mr. Work and Ms. Commons. The December 2011 GAO report on Navy-
Marine Corps FBWT reconciliation processes reported deficiencies with
which the Navy concurred. Since GAO conducted its assessment, Marine
Corps successfully demonstrated its FBWT reconciliation process to the
public accounting firm auditing the Marine Corp's SBR. There were no
findings or recommendations made. Reconciliations are performed on a
monthly basis; in addition, Marine Corps and DFAS-Cleveland have
documented the process with written procedures to address and improve
weaknesses in demonstrating comprehensive and repeatable FBWT
reconciliations.
For the Navy, progress has also been made to address similar
weaknesses noted in the GAO report. DFAS has further developed its BAM
tool, which is essential to successful and repeatable Navy FBWT
reconciliation. This year, DFAS has loaded the Navy data for fiscal
year 2010 through fiscal year 2012 appropriations and has completed
monthly FBWT reconciliations for the first 4 months of fiscal year
2012. DFAS expects to be current with monthly reconciliations at the
end of May 2012. DFAS is also retaining all documentation supporting
the monthly reconciliations. Further strengthening of the BAM tool's
internal controls is planned by third quarter of fiscal year 2012, and
DFAS expects the tool to fully support FBWT reconciliation by the
scheduled audit readiness date of March 2013. These milestones are
identified in joint DFAS-Navy detailed plans of actions and milestones.
The major challenge remaining in the Navy's FBWT reconciliation
process is the timely resolution of reconciling items--disbursements or
collections which do not precisely match obligations in the Navy's
accounting systems. Root causes of reconciling items are being
identified and corrected.
30. Senator Ayotte. Secretary Work and Secretary Commons, to what
extent do these deficiencies present a risk that your Services' SBRs
will not be audit-ready by the 2014 deadline?
Mr. Work and Ms. Commons. An effective and repeatable FBWT
reconciliation process is an essential capability for SBR audit
readiness. The Navy currently projects that this process will be
auditable by the second quarter of fiscal year 2013. Complete SBR
auditability is scheduled for fourth quarter of fiscal year 2013.
31. Senator Ayotte. Secretary Work and Secretary Commons, how
adequately do the Navy's and the Marine Corps' current plan of action
and milestones address these weaknesses in their ability to achieve
audit-readiness?
Mr. Work and Ms. Commons. The Navy has developed a comprehensive,
integrated Plan of Action and Milestones (POAM) governing audit
readiness efforts for the Navy's SBR. Each POAM action item is assigned
to a Navy manager or to a manager from the Navy's collaborative
partners and service providers. Each organization assigned actions
participated in the development of the POAM, which is updated on a
recurring basis by the Navy and its partners. The Navy tracks audit
readiness progress, as indicated by the Navy SBR POAM, on a continual
basis. Senior leaders responsible for audit readiness meet monthly for
a progress update. Accomplishments are noted, and emerging risks to
success are also discussed, along with any mitigating actions which are
required.
Accountability has been distributed to those organizations and
managers responsible for making the changes necessary to achieve audit
readiness. Flag officers have been assigned by the Vice Chief of Naval
Operations to lead the auditability efforts in different segments
comprising the Navy's SBR. In addition, all Navy senior executives have
an audit readiness objective in their annual performance plans. These
senior leaders are setting the ``tone-from-the-top;'' they are driving
the need for change in Navy business processes and systems which will
enable audit readiness.
GENERAL FUND ENTERPRISE BUSINESS SYSTEM
32. Senator Ayotte. Secretary Westphal and Secretary Matiella,
please provide an assessment of the General Fund Enterprise Business
System (GFEBS).
Mr. Westphal and Ms. Matiella. The GFEBS is already the Army's
primary financial accounting and management system, and the cornerstone
for producing unqualified financial statements for the Army general
fund. GFEBS enables the Army to comply with numerous statutory and
regulatory requirements, which include:
94.7 percent compliance (or 1,054 of 1,113
requirements) from the Federal Financial Management Improvement
Act (FFMIA) with full compliance later this fiscal year 2012.
Source: U.S. Army Audit Agency.
98 percent compliance with DOD's Business Enterprise
Architecture.
92 percent compliance (212 of 232 applicable
requirements) with DOD's Standard Financial Information
Structure (SFIS) with full compliance planned by the end of
fiscal year 2012.
100 percent compliance with DOD's 250 real property
accountability and inventory requirements.
Following extensive operational testing, the OSD Milestone Decision
Authority granted GFEBS a Full Deployment Decision in June 2011. GFEBS
is operational today with over 45,000 users at 20 commands and over 200
locations worldwide. GFEBS will add about 8,000 more users in July to
complete the Army-wide implementation at 71 countries around the globe.
In the 3 years since initial operations, GFEBS grew from 1 million
transactions in fiscal year 2009 to an estimated 60 million
transactions in fiscal year 2012 and from $1.2 billion in obligations
to over $100 billion executed in fiscal year 2012.
33. Senator Ayotte. Secretary Westphal and Secretary Matiella, how
is GFEBS helping the Army achieve its financial management goals?
Mr. Westphal and Ms. Matiella. GFEBS is critical to the Army's
financial management goals, which include producing unqualified
financial statements and providing cost accounting capability for more
effective use of resources.
GFEBS is providing the Army with:
A financial accounting system that complies with
statutory and regularity requirements for funds control,
accounting, and auditing, to include real property and other
asset data for depreciation; and provides visibility of the
transactional and budget execution data in real or near real
time. GFEBS provides the foundation for the Army to receive an
unqualified audit opinion on its annual general fund financial
statements.
A cost accounting system that provides full cost by
allocating overhead and other indirect costs to outcomes,
outputs, and services; and connects operational performance
data to the cost data. GFEBS enables the Army to conduct more
cost-benefit and other types of cost analyses as well as
transition to a cost culture.
A management and decision support system that records
financial and various other transactions in a single system,
provides visibility of the transactional data in real time or
near real time and provides trend, comparative, and other
analytic data. GFEBS will enable more thorough, fact-based
analyses for both current-year operational performance and
future programs and budgeting decisionmaking.
Consistent with OSD and Army goals to strengthen financial
management, GFEBS enables the Army to:
Reduce costs, by subsuming the capabilities of over
100 systems.
Standardize processes across all Army organizations.
Achieve compliance with numerous requirements,
including FFMIA, SFIS, and the Bureau of Economic Analysis.
Implement a transaction-driven general ledger as well
as tighter system controls in accordance with Federal
Information Systems Control Audit Manual (FISCAM) requirements.
With GFEBS, the Army is poised to support both a SBR audit
assertion in fiscal year 2014, as directed by the Secretary of Defense;
and fully auditable financial statements, as required by Congress by
2017.
34. Senator Ayotte. Secretary Westphal and Secretary Matiella, what
is the experience from the field in using the system?
Mr. Westphal and Ms. Matiella. The magnitude of change associated
with GFEBS is unprecedented in the Army business community. Not only is
GFEBS a major technology change, replacing 40-year-old financial
systems, but with the GFEBS deployment the Army is dramatically
changing business processes, user roles and functions, implementing a
new financial language (based on SFIS), and enforcing system and
processes controls that were not mandated in our previous systems.
The Army has embraced GFEBS and understands the value GFEBS
provides in achieving Army and DOD objectives. Before every GFEBS go-
live, each organization asserts its readiness for deployment and at
each of the 10 go-lives we have received universal concurrence from all
organizations in the Army and DFAS.
While there is a significant learning curve that must still be
overcome by those organizations that have recently gone live, those who
have been using the system are pleased with its capabilities. They
experience better data visibility, faster year-end close processes,
more streamlined reimbursable processes, and much greater cost
management capabilities. Not a single GFEBS user or organization that
has been using the system for more than a few months has ever asked to
go back to their legacy systems.
35. Senator Ayotte. Secretary Westphal and Secretary Matiella, I
understand that you received a qualified audit opinion on a portion of
the program. Can you explain what that means and its impact?
Mr. Westphal and Ms. Matiella. In November 2011 an independent
public accounting (IPA) firm issued a qualified opinion on five
business processes associated with the SBR at the first three
installations to deploy GFEBS (Forts Benning, Jackson, and Stewart). A
qualified audit opinion indicates that the information presented was
fairly presented with certain exceptions. A key area cited by the
auditors was the lack of supporting documentation to support the
samples.
The Army developed corrective actions to address all of these
findings in the report. This first exam and the subsequent exams
scheduled for fiscal year 2012 and fiscal year 2013 bring the Army
incrementally closer to meeting the fiscal year 2014 SBR deadline and
the fiscal year 2017 overall audit readiness deadline.
The good news is in examining approximately 2,500 supporting
documents, the auditor found consistency of standardized business
processes across all three sites, which significantly enables the
Army's audit readiness efforts.
36. Senator Ayotte. Secretary Westphal and Secretary Matiella, is
the GFEBS progressing according to the Army's expectations?
Mr. Westphal and Ms. Matiella. The progress of GFEBS development
and deployment is meeting the Army's expectations. In December 2011,
development of the system completed on schedule. In April 2012, 42
months after the initial pilot with one organization and 250 end-users,
GFEBS had 45,000 end-users in the Army and DFAS across 20 commands and
over 200 locations, and was executing billions of dollars of
transactions each month.
GFEBS is on track to fully subsume 68 legacy systems and partially
subsume 39 systems. GFEBS has already enabled the Army to retire 20
systems and reduce costs for data reconciliation and manual processes.
Additionally, GFEBS has begun disbursing funds directly through
Department of the Treasury as a pilot project, eliminating the need for
a number of interfaces. GFEBS is allowing the Army to reduce its IT
footprint, while streamlining and standardizing processes Army wide.
Given the significant business process change associated with
GFEBS, there have been some challenges in ensuring data, processes, and
system interfaces are working optimally. There have also been some
issues in ensuring that users at both the Army and DFAS understand
their new roles and responsibilities in this much more integrated
system, which requires greater competence in accounting and cost
management than was required in the past. The Army expected this would
be difficult because of the size and diversity of activities that
collectively provide the Nation with the finest land forces in the
world. However, GFEBS also provides visibility to non-compliant
business practices that were heretofore masked by our legacy systems,
and allows the Army to take corrective action to redesign these
processes to ensure auditability. We are pleased with our progress to
date and will continue to look holistically to ensure that people,
process, and technology are working in concert to overcome these
challenges and achieve the return on investment intended with this
system.
37. Senator Ayotte. Secretary Westphal and Secretary Matiella, what
is the justification for spinning off a portion of the existing system
to support some agencies and potentially recompeting sustainment early?
Mr. Westphal and Ms. Matiella. If ``spin off'' is referring to
GFEBS-Sensitive Activities (GFEBS-SA), GFEBS-SA is being developed to
meet the Army's validated requirement for a classified financial
management capability that integrates seamlessly with GFEBS to provide
secure, web-based financial execution and reporting capabilities to the
Army's Classified and Sensitive activities. GFEBS-SA will interface
with GFEBS to provide summary level financial data to facilitate total
general ledger accountability in one system. This will enable the Army
to meet the requirements of the FFMIA of 1996 and a Guide to Federal
Requirements for Financial Management Systems. GFEBS sustainment
contract will be competed in fiscal year 2013 (no change to previous
schedule).
LEGACY SYSTEMS VERSUS ENTERPRISE RESOURCE PLANNING SYSTEM
38. Senator Ayotte. Secretary Westphal and Secretary Matiella, what
current challenges related to achieving Secretary Panetta's audit goals
are due to legacy systems versus the current ERP system?
Mr. Westphal and Ms. Matiella. Legacy systems have some impact on
the Army's ability to achieve Secretary Panetta's audit goals. However,
the Army is accounting for any legacy systems that may impact the
financial statements in 2014 or 2017. First, the Army's aggressive and
successful implementation of GFEBS, which will be fully deployed in
July 2012, significantly contributes to the Army's ability to achieve
audit readiness. In addition, Global Combat Support System-Army (GCSS-
Army) will have largely completed its first of two major deployments
and be able to provide substantive support to the SBR assertion in
2014. Assessments have already begun to determine if further
remediation to the legacy systems is necessary.
The largest legacy system impact in 2014 is military pay. However,
the Army has already accounted for the Integrated Personnel and Pay
System-Army (IPPS-Army) timeline, which exceeds the 2014 SBR
requirements, by working to assess and correct any deficiencies in the
legacy military pay processes and systems. Upon ensuring the current
military pay processes and systems are auditable, Army will sustain the
current environment until the transition to IPPS-Army in 2017. Army's
audit readiness plan includes an assessment of ERPs to ensure that Army
is aware of any system deficiencies well in advance of the targeted
assertion dates.
______
Questions Submitted by Senator Saxby Chambliss
ARMY SENSITIVE ACTIVITIES PROCUREMENT
39. Senator Chambliss. Secretary Westphal and Secretary Matiella, I
understand that the Army is considering competing a portion of the
current GFEBS program for the SA. What is the Army's plan for future SA
procurement, continuing the success of the core program, and can you
explain any changes in your plans for this effort since you last
testified before this committee?
Mr. Westphal and Ms. Matiella. GFEBS-SA is being developed and
implemented as an individual program with cost, schedule, and
performance separate from the GFEBS base program. GFEBS-Army will
leverage Program Executive Office Enterprise Information Systems' (PEO
EIS) competitively awarded existing contract vehicle to procure
application development and system integration services. Anticipated
release of the Request for Proposal (RFP) is the fourth quarter of
fiscal year 2012. Since I last testified before this committee, a
decision was made to not fund GFEBS-Army during the fiscal year 2012
cycle but to commence program initiation in fiscal year 2013. The Army
is currently working with congressional staff on realignment of
funding.
DEFENSE ENTERPRISE AND ACCOUNTING MANAGEMENT SYSTEM
40. Senator Chambliss. Secretary Morin and Mr. Tillotson, has the
Air Force considered speeding up the deployment of the DEAMS rather
than carrying out limited deployments at select Air Force bases?
Dr. Morin and Mr. Tillotson. Yes, the Air Force has considered
speeding up the deployment of DEAMS. The Air Force plans to upgrade our
hosting facility architecture to coincide with the upgrade of the DEAMS
Oracle software. This parallel path to upgrade the application and the
hosting facility is the most cost effective and expedient approach for
delivering capabilities to the warfighter. We are carefully watching
the deployments of the other ERPs across DOD and the Federal Government
to ensure we are learning from others' efforts.
41. Senator Chambliss. Secretary Morin and Mr. Tillotson, you
testified that DEAMS is progressing on schedule. Can you explain how
you might deploy DEAMS Air Force-wide to get it into the hands of the
warfighters sooner?
Dr. Morin and Mr. Tillotson. The purpose of the Technology
Demonstration at Scott Air Force Base was to identify problems on a
limited scale prior to Air Force-wide deployment. Training was
initially conducted by DEAMS Subject Matter Experts, and the training
material was developed based on Oracle Modules, instead of DEAMS end-
user roles and responsibilities.
The Air Force captured lessons learned from the initial deployment
and is taking action to resolve deficiencies in the training during the
initial DEAMS Technology Demonstration. The Air Force is restructuring
the training to align with end-user roles and responsibilities to
ensure future training is a success and end-users receive sufficient
training on DEAMS. Additionally, the Air Force is utilizing the Oracle
User Productivity Kit (UPK) and hired professional instructors to
support end-user training. The expected completion date for training
restructuring is June 1, 2012. Following the updates, the DEAMS
deployment team will review the material with a focus group of Air
Mobility Command end-users from Scott and McConnell AFBs in early June.
______
Questions Submitted by Senator John Cornyn
FINANCIAL MANAGEMENT
42. Senator Cornyn. Secretary Hale and Ms. McGrath, according to
House Armed Services Committee hearings, DOD has over 48,000 civilian
financial managers. That's 48,000 accountants, auditors, financial
managers, budget analysts, clerks, administrators, payroll officials,
and others. On top of that, it is my understanding that there are
another 10,000 DOD military personnel who perform these roles. To put
this into perspective, this would be enough people to operate both the
ship and air crews for 10 aircraft carriers or the equivalent of 10
fully-equipped Army Brigade Combat Teams. It's more than 10 times the
number of combat aviators in the Air Force. How is it that you cannot
make more progress when you have 10 brigades worth of people coming to
work every day to help fix it?
Mr. Hale. DOD relies on these dedicated financial management
professionals to provide and manage the resources DOD uses to execute
the national security mission. The number of financial managers does
seem extraordinarily large on first glance.
To better understand the figures in light of DOD's enormous size
(over 3 million employees), we have performed analysis comparing our
financial management workforce to other Federal agencies as well as
large private sector companies. The size of our workforce and the
resources devoted to financial management as a percentage of resources
are in line with these organizations, using them as comparable
benchmarks.
I agree that we can make more progress on financial management, and
recent efforts including the involvement of Secretary Panetta have
already sped up that progress. In addition, as we implement more
automated and integrated processes, our financial management processes
will become less labor-intensive, offering opportunities for reducing
these numbers. Even more importantly, those personnel remaining will
have more time to devote to analysis and process improvement.
Ms. McGrath. DOD relies on these dedicated financial management
professionals to provide and manage the resources DOD uses to execute
the national security mission.
To better understand the figures in light of DOD's enormous size
(over 3 million employees), our Comptroller staff has conducted an
analysis comparing our financial management workforce to other Federal
agencies as well as large private sector companies. The number of
financial managers does seem extraordinarily large on first glance, but
when described as a percentage of DOD's population, the numbers align
to other Federal agencies. The size of our workforce and the resources
devoted to financial management as a percentage of resources are in
line with those benchmarks.
We agree that DOD can make more progress on financial management,
and recent efforts including the involvement of Secretary Panetta have
already accelerated our progress. In addition, as we implement more
automated and integrated processes, our financial managers will have
more time to devote to analysis and process improvement.
43. Senator Cornyn. Secretary Hale, you have regularly testified
that congressional involvement has helped spur action with regard to
improving financial management. Would you agree that Congress should
pass legislation codifying Secretary Panetta's announcement that DOD
would have an auditable financial statement on its SBR by 2014?
Mr. Hale. DOD is committed to achieving Secretary Panetta's goal of
an auditable SBR by 2014, regardless of whether the date is codified in
legislation. If Congress did pass legislation to codify the Secretary's
accelerated date, we recommend the legislation specify that ``the
general fund SBRs of material components are validated as ready for
audit by not later than September 30, 2014'' for consistency with the
Secretary's direction.
44. Senator Cornyn. Secretary Hale and Ms. McGrath, could you
please provide a date when DOD will be removed from GAO's high risk
list for fraud, waste, and abuse for financial management and business
transformation?
Mr. Hale and Ms. McGrath. GAO has established five criteria for
removal from the high-risk list that can form a roadmap for efforts to
improve and ultimately address high-risk issues: (1) Demonstrated top
leadership commitment; (2) Capacity, including people and other
resources to resolve the risk, and establishing reporting and
accountability mechanisms; (3) Corrective action plan that implements
solutions to address root causes; (4) Monitoring, including
establishing performance measures; and (5) Demonstrated progress in
implementing corrective actions and making appropriate adjustments to
action plans based on data. GAO makes the determination to remove an
area from the high-risk list once they conclude that sufficient
progress has been made in addressing the issues associated with the
high-risk area.
GAO noted in its February 2011 High-Risk Series Update that DOD is
taking steps to resolve the issues identified by GAO as associated with
the DOD Financial Management high-risk area. DOD is implementing
department-wide financial management improvements that provide timely,
reliable, accurate, and useful information for management operations,
including financial reporting and decisionmaking. Using the established
criteria, DOD believes that it is making good progress to address the
issues associated with the DOD Financial Management high-risk area. For
example, Secretary Panetta has demonstrated leadership commitment and
support to achieving audit readiness for DOD by accelerating the date
to achieve audit readiness of the SBR to the end of calendar year 2014.
While GAO cited progress by DOD on the Financial Management high-risk
area, it is unlikely that GAO will remove this area from the high-risk
list before 2017, which is when DOD is expected to meet the legal
requirements to achieve full audit readiness for all DOD financial
statements.
DOD believes that it has also made significant progress in the DOD
Approach to Business Transformation high-risk area. GAO cited DOD's
progress in establishing management oversight and developing a
strategic plan to guide business transformation efforts in its February
2011 High-Risk Series Update. The report noted that DOD's senior
leadership has demonstrated its commitment to address the risks by
filling key positions, issuing directives broadly defining the
responsibilities of the CMO and the Deputy Chief Management Officer
(DCMO), establishing governance entities, and issuing a strategic
management plan with two subsequent updates. DOD believes these changes
have led to a much better approach to business transformation within
DOD. More recent changes codified in the National Defense Authorization
Act for Fiscal Year 2012 will help DOD continue to make progress,
including using portfolio reviews to improve the business system
investment management review process and oversight of business systems.
DOD has also centralized defense business management under the Deputy's
Management Action Group, led by the Deputy Secretary of Defense. DOD is
hopeful that it has demonstrated enough progress in addressing the
issues associated with the DOD Approach to Business Transformation that
GAO will remove this area from the 2013 high-risk list update.
GENERAL FUND ENTERPRISE BUSINESS SYSTEM
45. Senator Cornyn. Secretary Westphal and Secretary Matiella,
GFEBS was developed by the Army's financial management community for
the Army's financial community. However, GAO found that two-thirds of
invoice and receipt data must be manually entered into GFEBS due to
interface problems. The DOD IG found the Army spent $630 million on
GFEBS, but that at the time it was tested it was not compliant with the
U.S. Standard General Ledger (USSGL) and the Standard Financial
Information System (SFIS). How do you explain this failure?
Mr. Westphal and Ms. Matiella. As stated in the Army's response to
the DOD IG audit report, the Army disagreed with the report's
assertions. At the time of the audit, GFEBS was not fully configured or
fully deployed and was transacting less than 2 percent of the Army's
general fund total obligation authority.
The results of the GFEBS SFIS compliance review conducted in June
2011 by the DOD Office of the DCMO concluded that GFEBS is 92 percent
compliant with DOD SFIS business rules with full compliance planned by
the end of fiscal year 2012. In addition, DOD and the Army have
established procedures to continue reviewing all ERPs for SFIS
compliance going forward.
Furthermore, as of September 30, 2011, GFEBS accounted for the
missing USSGL and 28 DOD reporting accounts the DOD IG identified as
missing. The absence of these accounts on September 30, 2010 (the time
of the DOD IG audit) did not materially impact Army's ability to
provide accurate financial information in GFEBS. None of these accounts
were required to support the GFEBS user base as of September 30, 2010,
which only encompassed approximately 1.9 percent of the Army's general
fund total obligation authority.
46. Senator Cornyn. Secretary Westphal and Secretary Matiella, how
do you plan to reach auditability when the systems you are purchasing
are themselves not auditable?
Mr. Westphal and Ms. Matiella. Systems must meet numerous Federal
standards, including the FFMIA, the DOD SFIS, and the GAO FISCAM, among
others. However, the systems are not meant to be auditable in the sense
that financial statements are auditable. The systems form the
foundation for financial statement auditability.
To ensure these systems comply with additional Federal financial
system standards, the Army utilizes the Army Audit Agency to audit for
FFMIA compliance and the OSD DCMO for SFIS compliance.
In addition, the Army is conducting assessments to ensure GFEBS
meets or exceeds Federal systems standards and can successfully meet
FISCAM requirements. In 2011 the Army began a FISCAM assessment of
GCSS-A that includes the same scope of work defined for GFEBS and will
begin a FISCAM assessment of Logistics Modernization Program (LMP) in
the fourth quarter of fiscal year 2012.
GLOBAL COMBAT SUPPORT SYSTEM-ARMY
47. Senator Cornyn. Secretary Westphal and Secretary Matiella,
according to GAO, adding the requirement that the GCSS-Army be
auditable added $200 million in cost and 2 years of development
time for a commercial off-the-shelf (COTS) system that now
won't be ready until 2017. Long-established laws, such as
Clinger-Cohen and the FFFMIA, have mandated that the Army only purchase
business/finance systems that provide auditable financial information.
Did the Army break these laws in spending $891 million to date on GCSS-
Army?
Mr. Westphal and Ms. Matiella. No, the Army did not break these
laws. The GCSS-Army system uses the commercial product SAP. The SAP
product does provide auditable financial information and is used to do
so in thousands of companies around the world.
The $200 million increase in cost and the 2 years of time added for
deployment was to add missing units to the scope of the program. The
Army was not going to be auditable because not all of the parts of the
Army that needed it were going to get the system--the Directorate of
Logistics (DOL) organizations were not in scope.
The scope was expanded to add the DOL organizations on posts,
camps, and stations around the Army. The DOL provides repair and return
maintenance, back-up supply, and in some cases, a forward capability to
support limited depot level maintenance. The GCSS-Army program, as
originally baselined, did not include these organizations as part of
the base. The scope was expanded to incorporate these units into the
GCSS-Army system.
ARMY MILITARY PAY
48. Senator Cornyn. Secretary Westphal and Secretary Matiella, GAO
recently released a scathing report on Army military pay, raising all
sorts of issues regarding identification of payroll accounts,
validating transactions, and matching records. The report raises
serious questions regarding whether the Army will be able to meet
Secretary Panetta's 2014 deadline for auditability for the Army's SBR.
Out of all the Army processes that should be auditable, it would seem
that paying your people would be the easiest. How do you explain the
problems GAO found?
Mr. Westphal and Ms. Matiella. Our goal for Army military pay audit
readiness is to ensure controls are in place to continue paying
soldiers the right entitlements, in the right amounts, at the right
time, and to accurately report these transactions on the financial
statements. Together, the Army and DFAS are working to meet the fiscal
year 2014 SBR assertion deadline. As a part of DOD audit readiness
strategy, we are documenting the military pay processes and control
environment, testing the key internal controls, developing and
implementing corrective actions to address gaps and deficiencies, and
establishing a process for recurring control testing to sustain the
auditable environment.
The majority of GAO's findings are consistent with the corrective
actions the Army expected GAO would find because they are the same
types of obstacles the U.S. Marine Corps has faced and the Army faces
in other business processes, namely insufficient supporting
documentation or inefficient processes for gathering the supporting
documentation. The Army is working closely with DFAS, OSD-C, and GAO to
address these findings and will have all GAO recommendations
implemented by June 30, 2013.
ARMY ENTERPRISE RESOURCE PLANNING
49. Senator Cornyn. Secretary Westphal and Secretary Matiella, has
the Army saved money with its deployment of its ERP systems? If not
yet, when will it?
Mr. Westphal and Ms. Matiella. The Army will save money with the
deployment of our four ERPs through the streamlining of business
processes and retirement of legacy business systems.
As of today, only one ERP is fully deployed, the LMP, however, the
GFEBS will be fully deployed later this fiscal year. The two remaining
Army ERPs, the GCSS-Army and the IPPS-Army are projected to be fully
deployed in fiscal year 2016 and fiscal year 2017 respectively.
Based on the standard Cost-Benefit Analysis that is approved for
each acquisition program, the break-even point for our investment is
slightly different for each ERP investment. For example, the break-even
point for GFEBS is fiscal year 2019. Similar analysis has been
completed for each investment and is reviewed and approved by the DOD
Acquisition Authority for each Major Automated Information System.
In addition to the calculated savings and benefits, the four Army
ERPs are critical to the Army achieving the congressionally-mandated
goal of financial auditability. The benefits of being financially
transparent and good stewards of public funds are not included in the
Cost-Benefit Analysis but, nonetheless, an important aspect of our
investment decision.
DEFENSE ENTERPRISE AND ACCOUNTING MANAGEMENT SYSTEM
50. Senator Cornyn. Secretary Morin and Mr. Tillotson, GAO found
that more than half of the users of the Air Force's main financial ERP
system, DEAMS, were not prepared to use the system after the training.
Who conducted this training?
Dr. Morin and Mr. Tillotson. The purpose of the Technology
Demonstration at Scott Air Force Base was to identify problems on a
limited scale prior to Air Force-wide deployment. Training was
initially conducted by DEAMS Subject Matter Experts, and the training
material was developed based on Oracle Modules, instead of DEAMS end-
user roles and responsibilities.
The Air Force captured lessons learned from the initial deployment
and is taking action to resolve deficiencies in the training during the
initial DEAMS Technology Demonstration. The Air Force is restructuring
the training to align with end-user roles and responsibilities to
ensure future training is a success and end users receive sufficient
training on DEAMS. Additionally, the Air Force is utilizing the Oracle
UPK and hired professional instructors to support end-user training.
The expected completion date for training restructuring is June 1,
2012. Following the updates, the DEAMS deployment team will review the
material with a focus group of Air Mobility Command end-users from
Scott and McConnell AFBs in early June.
51. Senator Cornyn. Secretary Morin and Mr. Tillotson, if it was a
contractor, were they paid to conduct this training?
Dr. Morin and Mr. Tillotson. Contractors that supported the
training were paid to conduct the training in accordance with the
approved statement of work.
52. Senator Cornyn. Secretary Morin and Mr. Tillotson, was any
evaluation done on the effectiveness of this training?
Dr. Morin and Mr. Tillotson. An evaluation was conducted on the
DEAMS Technology Demonstration training. This evaluation informed the
Air Force lessons learned, which led to the development of role-based
training, hiring professional trainers to work with Subject Matter
Experts, and utilizing the Oracle UPK Module to support DEAMS training
activities.
53. Senator Cornyn. Secretary Morin and Mr. Tillotson, were
contractors asked to refund any money for training that was
ineffective?
Dr. Morin and Mr. Tillotson. No, contractors were not asked to
refund money for ineffective training. The training was conducted in
accordance with the approved statement of work. Based on the evaluation
of the training, the Air Force has revamped the training to meet user
needs in transitioning from the legacy financial systems to DEAMS.
54. Senator Cornyn. Secretary Morin and Mr. Tillotson, has the Air
Force saved money with the deployment of its ERPs? If not yet, when
will it?
Dr. Morin and Mr. Tillotson. The Air Force has three key ERPs:
DEAMS, Air Force-IPPS, and Expeditionary Combat Support System (ECSS).
DEAMS is expected to begin generating savings 1 year after
Increment 1 reaches Full Operational Capability (FOC). FOC is projected
for fiscal year 2016; therefore, savings are projected to begin in
fiscal year 2017. Air Force-IPPS is expected to begin generating
savings in fiscal year 2018. The ECSS Critical Change Team, headed by
the Program Management Office, is still refining its assessment as a
result of additional efforts necessary to finalize the Critical Change
Report currently planned to go to Congress in August 2012. At that
time, the Air Force expects to have cost savings estimated for the
restructured program. The Air Force is fundamentally reshaping the ECSS
program for more timely and efficient delivery of logistics
transformation that will also enable audit readiness.
55. Senator Cornyn. Secretary Morin and Mr. Tillotson, because of
the Air Force's failure to modernize its financial systems and its
extremely slow progress in adopting COTS technology, how much money
will the Air Force have to spend on modernizing its legacy financial
systems to meet the deadline set by the Secretary of Defense for a
clean audit of the SBR?
Dr. Morin and Mr. Tillotson. The Air Force is documenting and
testing the existing systems and processes to identify what changes are
required. This process is expected to continue for at least another
year. Only at that time will the Air Force be able to estimate a cost
based on identifying the extent of the required changes and evaluating
compensating process controls.
NAVY ENTERPRISE RESOURCE PLANNING
56. Senator Cornyn. Secretary Work and Secretary Commons, the DOD
IG found that the Navy was not compliant with the USSGL and the SFIS.
How is it that the Navy's main financial ERP system is not compliant?
Mr. Work and Ms. Commons. At this point, the Navy ERP system
includes all USSGL accounts appropriate for the accounting and business
requirements of the Navy. The Navy does not plan to implement all the
USSGL accounts defined by the DOD chart of accounts as there are no
accounting or business requirements for some accounts, and to include
unnecessary accounts would be too costly and administratively
burdensome. For example, Navy ERP is required to use Moving Average
Cost not Latest Acquisition Cost (LAC) for inventory valuation, and
therefore does not use account 1521.0900: Inventory Purchase for
Resale--LAC. The Navy is currently evaluating the 110 general ledger
accounts mentioned in the DOD IG audit and will work with the OSD
(Comptroller) to determine the appropriateness of including any of
these accounts in the Navy ERP system. Our estimated date of updating
the system with any appropriate accounts is September 30, 2012.
The SFIS standards were developed and implemented in 2006, after
the ERP system completed its design. SFIS business rules were
introduced in 2009 along with data requirements; thus SFIS standards,
rules, and data requirements continue to change and evolve. For
example, the Navy is currently working to implement Version 8.0. We
will continue to work within the Navy and with the OSD DCMO to ensure
compliance with the SFIS standards.
57. Senator Cornyn. Secretary Work and Secretary Commons, who is
responsible for the failure of Navy ERP to comply with long-established
Federal laws governing the purchase of Federal financial systems?
Mr. Work and Ms. Commons. Since program establishment in 2003, the
Navy ERP has complied with all applicable Federal and DOD acquisition
statutes and policies.
58. Senator Cornyn. Secretary Work and Secretary Commons, how can
the Navy expect to obtain auditable financial statements when the ERP
system it is purchasing does not comply with the law?
Mr. Work and Ms. Commons. The Navy ERP system is in compliance with
relevant laws and statutes. The system will enhance the Navy's ability
to produce auditable financial statements through significantly
improved process, internal controls, and documentation. The Navy is
currently conducting an assessment of the Navy ERP system controls for
compliance with the FISCAM standards using an independent public
accounting firm. We expect to complete this assessment by the end of
2012.
59. Senator Cornyn. Secretary Work and Secretary Commons, has the
Navy saved money with its deployment of Navy ERP? If not yet, when will
it?
Mr. Work and Ms. Commons. Monetary benefit resulting from the
deployment of Navy ERP is captured in two primary areas:
Legacy IT system savings of $350 million resulting
from the retirement of systems and fewer system interfaces. The
Navy is scheduled to have retired 74 systems by the end of
fiscal year 2012, with 10 more to be retired by 2016.
Supply inventory reductions resulting from improved
inventory control and a reduction of excess inventory items.
Improved inventory management is expected to result in a
reduction in Navy Supply Working Capital Fund rates amounting
to $276 million from fiscal year 2012 through fiscal year 2017
and expected cost avoidance of $456 million for fiscal year
2018 through fiscal year 2023.
[Whereupon, at 4:44 p.m., the subcommittee adjourned.]
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