Pervasive Financial and Business Management Problems Affect DOD’s Efficiency and Effectiveness

Since the first GAO report on the financial statement audit of a major DOD  component over 16 years ago, we have repeatedly reported that  weaknesses in business management systems, processes, and internal  controls not only adversely affect the reliability of reported financial data,  but also the management of DOD operations. To  date, none of the military services or major DOD components has passed  the test of an independent financial audit because of pervasive weaknesses  in internal control and processes and fundamentally flawed business  systems. DOD’s financial management problems are pervasive, complex, long- standing, deeply rooted in virtually all of its business operations, and  challenging to resolve. Improved Oversight of DOD Business Systems Needed

The department is provided billions of dollars annually to operate,  maintain, and modernize its stovepiped, duplicative, legacy business  systems. Many of the problems related to DOD’s inability to effectively implement  its business systems on time, within budget, and with the promised  capability can be attributed to its failure to implement the disciplined  processes necessary to reduce the risks associated with these projects to  acceptable levels. Defense Travel System (DTS). We have previously reported  on DOD’s long-standing architecture management weaknesses. DOD’s top management has demonstrated a commitment  to transforming the department and has launched key initiatives to  improve its financial management processes and related business systems,  as well as made important progress in complying with legislation  pertaining to its business systems modernization and financial  management improvement efforts. While this progress  better positions the department to address the business systems  modernization and financial management high-risk areas, significant  challenges remain, particularly in implementing its tiered accountability  investment approach. DOD Issued Its Financial Improvement and Audit Readiness Plan

A major component of DOD’s business transformation strategy is its FIAR  Plan, issued in December 2005. The FIAR Plan was issued pursuant to  section 376 of the National Defense Authorization Act for Fiscal Year  2006, which for fiscal year 2006 limited DOD’s ability to obligate or  expend funds for financial improvement activities until the department  submitted a comprehensive and integrated financial management  improvement plan to congressional defense committees that (1) described  specific actions to be taken to correct deficiencies that impair the  department’s ability to prepare timely, reliable, and complete financial  management information; and (2) systematically tied such actions to  process and control improvements and business systems modernization  efforts described in the business enterprise architecture and transition  plan. DOD Developed an Initial Standard Financial Information Structure

Another key initiative is SFIS, which is DOD’s enterprisewide data  standard for categorizing financial information to support financial  management and reporting functions. We reiterate  two major elements necessary for successful business transformation:     (1) a comprehensive, integrated, and enterprisewide business  transformation plan and (2) a CMO with the right skills and at the right  level of the department for providing the sustained leadership needed to  achieve a successful and sustainable transformation effort. DOD’s leadership has recognized the need to transform the department’s  business operations. Because of the complexity and  long-term nature of DOD’s business transformation efforts, we reiterate  the need for a CMO to provide sustained leadership and maintain  momentum. The  CMO also would develop and implement a strategic plan for the overall  business transformational efforts. Until DOD resolves the numerous  problems and inefficiencies in its business operations, billions of dollars  will continue to be wasted every year.
Why GAO Did This Study

The Department of Defense (DOD) bears sole responsibility for eight DOD-specific high-risk areas and shares responsibility for six governmentwide high-risk areas. These high-risk areas reflect the pervasive weaknesses that cut across all of DOD's major business operations. Several of the high-risk areas are inter-related, including, but not limited to, financial management, business systems modernization, and DOD's overall approach to business transformation. Billions of dollars provided to DOD are wasted each year because of ineffective performance and inadequate accountability. DOD has taken some positive steps to successfully transform its business operations and address these high-risk areas, but huge challenges remain. This testimony discusses (1) pervasive, long-standing financial and business management weaknesses that affect DOD's efficiency; (2) some examples that highlight a need for improved business systems development and implementation oversight; (3) DOD's key initiatives to improve financial management, related business processes, and systems; and (4) actions needed to enhance the success of DOD's financial and business transformation efforts.

What GAO Found

DOD's pervasive financial and business management problems adversely affect the economy, efficiency, and effectiveness of its operations, and have resulted in a lack of adequate accountability across all major business areas. These problems have left the department vulnerable to billions of dollars of fraud, waste, and abuse annually, at a time of increasing fiscal constraint. Further evidence of DOD's problems is the long-standing inability of any military service or major defense component to pass the test of an independent financial audit because of pervasive weaknesses in financial management systems, operations, and controls. To support its business operations, DOD invests billions of dollars each year to operate, maintain, and modernize its business systems. But despite this significant annual investment, GAO has continued to identify business system projects that have failed to be implemented on time, within budget, and with the promised capability. For example, in January 2006, GAO reported on problems with the implementation of the Defense Travel System--a project that was initiated in September 1998. DOD's many high-risk challenges are years in the making and will take time to effectively address. Top management has demonstrated a commitment to transforming the department's business processes. In December 2005, DOD issued its Financial Improvement and Audit Readiness Plan to guide its financial management improvement efforts. Also, DOD has developed an initial Standard Financial Information Structure, which is DOD's enterprisewide data standard for categorizing financial information. Because of the complexity and long-term nature of DOD transformation efforts, GAO would like to reiterate two missing critical elements that need to be in place if DOD's transformation efforts are to be successful. First, DOD should develop and implement a comprehensive, integrated, and enterprisewide business transformation plan. Second, GAO continues to support the creation of a chief management officer, with the right skills and at the right level within the department, to provide the needed sustained leadership to oversee the department's overall business transformation process.