By linking financial  and performance information, the PARs provide important information  about the return on the taxpayers’ investment in agency programs and  operations. Effective financial management is also fundamental to achieving DOD’s  broader business transformation goals in the areas of asset management,  acquisition and contract management, and business systems  modernization. Effect of Continuing Financial Management Weaknesses on DOD Management and Operations

As we have previously reported, long-standing weaknesses in DOD’s  financial management adversely affect the economy, efficiency, and  effectiveness of the department’s operations.and related business management and system deficiencies continue to  adversely affect its ability to control costs; ensure basic accountability;  anticipate future costs and claims on the budget; measure performance;  maintain funds control; prevent and detect fraud, waste, and abuse; and  address pressing management issues. As we have previously  recommended, the successful transformation of DOD’s financial  management processes and operations is necessary for DOD to routinely  generate timely, complete, and reliable financial and other information for   DOD’s pervasive financial  day-to-day decision making, including the information needed to  effectively (1) manage its assets, (2) assess program performance and  make budget decisions, (3) make cost-effective operational choices, and  (4) provide accountability over the use of public funds. Problems in accounting for liabilities affect the determination  of the full cost of the federal governments operations and the extent of  its liabilities. The flawed methodology  for estimating improper payments also limits the effectiveness of  DOD’s corrective actions. In a February 2014 report on our audit of the U.S. government’s  consolidated financial statements, we reported that DOD was  responsible for the majority of the federal government’s inventories  and property, plant, and equipment and that DOD did not maintain  adequate systems or have sufficient records to provide reliable  information on these assets. In February  2012, we reported that DOD’s reports to the Congress on estimated  weapon system operating and support costs are often inconsistent  and sometimes unreliable, limiting visibility needed for effective  oversight of these costs. Continuing reports of violations of the Antideficiency Act (ADA) and  other fiscal laws, such as the Purpose Statute, underscore DOD’s  inability to assure that obligations and expenditures are properly  recorded and do not exceed statutory levels of control. According to copies of ADA violation reports we reviewed, DOD  reported 75 ADA violations from fiscal year 2007 through fiscal year  2012, totaling nearly $1.1 billion. Process for identifying and mitigating risks to the FIAR effort. Component implementation of the FIAR Guidance. We recommended that DOD take  various actions to improve the development, implementation,  documentation, and oversight of DOD’s financial management  improvement efforts. DOD agreed with our recommendation and is taking actions  to address it. Without a competent workforce and effective implementation of financial  management processes, systems, and controls, DOD and its components  are at risk that DOD’s other financial management reform activities will  not be successful, resulting in incomplete and unreliable data for decision  making. In conclusion, while DOD has several financial management improvement  efforts under way and is monitoring progress against milestones, as the  dates for validating audit readiness approach, DOD has emphasized  asserting audit readiness by a certain date over making sure that effective  processes, systems, and controls are in place to ensure that its  components have improved financial management information for day-to- day decision making. While  establishing and working toward milestones are important to measure  progress, DOD should not lose sight of the ultimate goal of implementing  lasting financial management reform to ensure that it has the systems,  processes, and personnel to routinely generate reliable financial  management and other information critical to decision making and  effective operations for achieving its missions. DOD Financial Management: Ineffective Risk Management Could Impair  Progress toward Audit-Ready Financial Statements. High-Risk Series: An Update.
Why GAO Did This Study

Given the federal government's continuing fiscal challenges, it is more important than ever that the Congress, the administration, and federal managers have reliable, useful, and timely financial and performance information to help ensure fiscal responsibility and demonstrate accountability, particularly for the federal government's largest department, the Department of Defense. GAO has previously reported that serious and continuing deficiencies in DOD's financial management make up one of three major impediments to achieving an opinion on the U.S. government's consolidated financial statements.
GAO's statement focuses on (1) the effect of continuing financial management challenges on DOD management and operations and (2) DOD's efforts to improve financial management and its remaining challenges. GAO's statement is primarily based on previously issued reports, including GAO's updates on DOD high-risk areas and its audit reports on DOD's financial management, inventory management and asset visibility, weapon system costs, business transformation, and business system modernization.

What GAO Found

Long-standing weaknesses in the Department of Defense's (DOD) financial management adversely affect the economy, efficiency, and effectiveness of its operations. The successful transformation of DOD's financial management processes and operations will allow DOD to routinely generate timely, complete, and reliable financial and other information for day-to-day decision making, including the information needed to effectively (1) manage its assets, (2) assess program performance and make budget decisions, (3) make cost-effective operational choices, and (4) provide accountability over the use of public funds. Examples of the operational impact of DOD's financial management weaknesses include
the inability to properly account for and report DOD's total assets—about 33 percent of the federal government's reported total assets—including inventory ($254 billion) and property, plant, and equipment ($1.3 trillion);
the inability to accurately estimate the extent of its improper payments because of a flawed estimating methodology, which also limits corrective actions;
inconsistent and sometimes unreliable reports to the Congress on estimated weapon system operating and support costs, limiting visibility needed for effective oversight of these costs; and
continuing reports of Antideficiency Act violations—75 such violations reported from fiscal year 2007 through fiscal year 2012, totaling nearly $1.1 billion—which emphasize DOD's inability to ensure that obligations and expenditures are properly recorded and do not exceed statutory levels of control.
DOD has numerous efforts under way to address its long-standing financial management weaknesses. The Congress has played a major role in many of the corrective actions by mandating them in various fiscal year National Defense Authorization Acts. However, improving the department's financial management operations and thereby providing DOD management and the Congress more accurate and reliable information on the results of its business operations will not be an easy task. Key challenges remain, such as identifying and mitigating risks to achieving the goals of DOD's Financial Improvement and Audit Readiness (FIAR) effort and successfully implementing the FIAR Guidance at the DOD component level, modernizing DOD's business information systems, and improving the financial management workforce.
DOD is monitoring its component agencies' progress toward audit readiness. However, as dates for validating audit readiness approach, DOD has emphasized asserting audit readiness by a certain date instead of making sure that effective processes, systems, and controls are in place, without which it cannot ensure that its components have improved financial management information for day-to-day decision making. While time frames are important to measuring progress, DOD should not lose sight of the ultimate goal of implementing lasting financial management reform to ensure that it can routinely generate reliable financial management and other information critical to decision making and effective operations.

What GAO Recommends

GAO has previously made numerous recommendations for improving financial systems and business systems that provide financial information as well as related processes and internal controls. DOD has generally agreed with GAO's recommendations and is taking actions to address many of them.