DOD’s serious financial management and related business systems  problems led us in 1995 to put both DOD financial management and  systems modernization on our list of high-risk areas in the federal  government, a designation that continues today. Effective and efficient asset management and accountability is crucial to  DOD’s defense of our national interests. Weak Control Environment

Fundamental flaws in DOD’s systems, processes, and overall control  environment leave the department at risk of fraud, waste, and abuse. We first identified underlying causes for the department’s inability to  resolve its long-standing financial management problems, as well as the  other areas of its operations most vulnerable to waste, fraud, abuse, and  mismanagement, in our May 1997 testimony. There are four underlying causes:  a lack of sustained top-level leadership and management accountability   deeply embedded cultural resistance to change, including military  service parochialism and stovepiped operations;  a lack of results-oriented goals and performance measures and   inadequate incentives for seeking change. These elements, which we  believe are key to any successful approach to financial management  reform, include  addressing the department’s financial management challenges as part of  a comprehensive, integrated, DOD-wide business reform;  providing for sustained leadership by the Secretary of Defense and  resource control to implement needed financial management reforms;  establishing clear lines of responsibility, authority, and accountability  for such reform tied to the Secretary;  incorporating results-oriented performance measures and monitoring  tied to financial management reforms;  providing appropriate incentives or consequences for action or inaction;  establishing and implementing an enterprise architecture to guide and  direct financial management modernization investments; and  ensuring effective executive and congressional oversight and  monitoring. Central to effectively addressing DOD’s financial management  problems will be the recognition that they cannot be addressed in an  isolated fashion separate from the other high-risk areas and management  challenges facing the department. These are important steps in DOD’s plans to  develop a human capital investment strategy and plan. DOD’s vast array of costly, nonintegrated, duplicative, and  inefficient financial management systems reflects its lack of an integrated  approach to addressing management challenges. DOD has already taken a number of actions under its business  transformation program. In discussing their April 2001 report to the Secretary of Defense on  transforming financial management, the authors stated that, “unlike  previous failed attempts to improve DOD’s financial practices, there is a  new push by DOD leadership to make this issue a priority.”  To demonstrate  his commitment towards reforming the department, Secretary Rumsfeld  designated improving financial management operations, which included  not only finance and accounting but also such business areas as logistics,  acquisition, and personnel management, as 1 of the department’s top 10  priorities for reform. The Secretary of Defense has taken action to vest responsibility and  accountability for financial management modernization with the DOD  Comptroller. DOD is investing billions of dollars in financial management solutions and  business process reform. DOD can ill afford to invest billions of dollars in  systems that are not capable of providing DOD management and the  Congress with more accurate, timely, and reliable information on the  results of the department’s business operations. Monitoring and Oversight

Ensuring effective monitoring and oversight of progress will also be key to  bringing about effective implementation of the department’s financial  management and related business process reform.
Why GAO Did This Study

As seen again in Iraq, the excellence of our military forces is unparalleled. This same level of excellence is not yet evident in the Department of Defense's (DOD) financial management and other business areas, impeding DOD's ability to provide complete, reliable, and timely information to the Congress, DOD managers, and other decision makers. Congress asked GAO to testify on the status of DOD's financial management and business process reform efforts. Specifically, GAO was asked to provide an overview of the long-standing financial management weaknesses facing DOD and a summary of the underlying causes of DOD's financial management challenges. In addition, GAO's testimony focused on (1) key actions necessary to correct DOD's financial management problems and (2) the progress DOD is making toward business process reform.

What GAO Found

Overhauling DOD's financial management represents a major challenge that goes far beyond financial accounting to the very fiber of the department's range of business operations and management culture. Of the 25 areas on GAO's governmentwide "high risk" list, 6 are DOD program areas, and the department shares responsibility for 3 other high-risk areas that are governmentwide in scope. Key financial management weaknesses include the lack of effective and efficient asset management and accountability; unreliable estimates of environmental and disposal liabilities; lack of accurate budget and cost information; nonintegrated and proliferating financial management systems; and fundamental flaws in DOD's overall control environment. GAO has identified four underlying causes for DOD's inability to resolve its long-standing financial management problems: (1) a lack of sustained top-level leadership and management accountability for correcting problems; (2) deeply embedded cultural resistance to change, including military service parochialism and stovepiped operations; (3) a lack of results-oriented goals and performance measures and monitoring; and (4) inadequate incentives for seeking change. The following are elements that GAO has identified as key to a successful approach to financial management and business process reform: (1) addressing financial management challenges as part of a comprehensive, integrated, DOD-wide business reform; (2) providing for sustained leadership by the Secretary of Defense and resource control to implement needed financial management reforms; (3) establishing clear lines of responsibility, authority, and accountability for such reform tied to the Secretary; (4) incorporating results-oriented performance measures and monitoring tied to financial management reforms; (5) providing appropriate incentives or consequences for action or inaction; (6) establishing and implementing an enterprise architecture to guide and direct financial management modernization investments; and (7) ensuring effective executive and congressional oversight and monitoring. DOD has taken positive steps in many of these key areas. For example, the Secretary of Defense has included improving DOD's financial management as one of his top 10 priorities, and DOD has already taken a number of actions under its Business Transformation Program, including its efforts to develop an enterprise architecture to guide operational and technological changes. However, these are beginning steps and formidable challenges remain in each of the key reform areas.