[Senate Hearing 108-660]
[From the U.S. Government Publishing Office]
S. Hrg. 108-660
THE FEDERAL GOVERNMENT'S FINANCIAL STATEMENT AND ACCOUNTABILITY OF
TAXPAYER DOLLARS AT THE DEPARTMENTS OF DEFENSE AND HOMELAND SECURITY
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HEARING
before the
FINANCIAL MANAGEMENT, THE BUDGET, AND INTERNATIONAL SECURITY
SUBCOMMITTEE
of the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JULY 8, 2004
__________
Printed for the use of the Committee on Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
95-194 WASHINGTON : 2004
____________________________________________________________________________
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COMMITTEE ON GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas
Michael D. Bopp, Staff Director and Chief Counsel
Joyce A. Rechtschaffen, Minority Staff Director and Counsel
Amy B. Newhouse, Chief Clerk
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FINANCIAL MANAGEMENT, THE BUDGET, AND INTERNATIONAL SECURITY
SUBCOMMITTEE
PETER G. FITZGERALD, Illinois, Chairman
TED STEVENS, Alaska DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
ARLEN SPECTER, Pennsylvania THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas
Michael J. Russell, Staff Director
Richard J. Kessler, Minority Staff Director
Nanci E. Langley, Minority Deputy Staff Director
Tara E. Baird, Chief Clerk
C O N T E N T S
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Opening statements:
Page
Senator Fitzgerald........................................... 1
Senator Akaka................................................ 4
WITNESSES
Thursday, July 8, 2004
Hon. David M. Walker, Comptroller General, U.S. Government
Accountability Office.......................................... 6
Linda M. Springer, Controller, Office of Federal Financial
Management, U.S. Office of Management and Budget............... 9
Donald V. Hammond, Fiscal Assistant Secretary, U.S. Department of
the Treasury................................................... 11
Lawrence J. Lanzillotta, Acting Under Secretary of Defense
(Comptroller).................................................. 24
Francis E. Reardon, Deputy Inspector General for Auditing, U.S.
Department of Defense.......................................... 26
Gregory D. Kutz, Director, Financial Management and Assurance,
U.S. Government Accountability Office.......................... 28
Andrew B. Maner, Chief Financial Officer, U.S. Department of
Homeland Security.............................................. 28
Clark Kent Ervin, Inspector General, U.S. Department of Homeland
Security....................................................... 30
McCoy Williams, Director, Financial Management and Assurance,
U.S. Government Accountability Office.......................... 31
Alphabetical List of Witnesses
Ervin, Clark Kent:
Testimony.................................................... 30
Prepared statement........................................... 229
Hammond, Donald V.:
Testimony.................................................... 11
Prepared statement........................................... 95
Kutz, Gregory D.:
Testimony.................................................... 28
Prepared statement........................................... 195
Lanzillotta, Lawrence J.:
Testimony.................................................... 24
Prepared statement with attachments.......................... 102
Maner, Andrew B.:
Testimony.................................................... 28
Prepared statement........................................... 223
Reardon, Francis E.:
Testimony.................................................... 26
Prepared statement........................................... 176
Springer, Linda M.:
Testimony.................................................... 9
Prepared statement........................................... 89
Walker, Hon. David M.:
Testimony.................................................... 6
Prepared statement........................................... 45
Williams, McCoy:
Testimony.................................................... 31
Prepared statement........................................... 245
APPENDIX
Questions and Responses submitted for the Record from:
Mr. Walker................................................... 260
Mr. Springer................................................. 269
Mr. Hammond.................................................. 278
Mr. Reardon.................................................. 279
Mr. Kutz..................................................... 284
Mr. Maner.................................................... 289
Mr. Ervin.................................................... 290
Mr. Williams................................................. 297
Chart of a Memorandum for Under Secretary of Defense from Paul J.
Granetto, CPA, Director, Defense Financial Auditing Service of
an Independent Auditor's Report on the Department of Defense
Fiscal Year 2003 Agency-Wide Principal Financial Statements.... 304
Chart entitled ``DOD Financial Management: Systemic Examples of
Waste''........................................................ 307
Chart entitled ``DOD Financial Management: Operational and
Security Impacts............................................... 308
THE FEDERAL GOVERNMENT'S FINANCIAL STATEMENT AND ACCOUNTABILITY OF
TAXPAYER DOLLARS AT THE DEPARTMENTS OF DEFENSE AND HOMELAND SECURITY
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THURSDAY, JULY 8, 2004
United States Senate,
Financial Management, the Budget, and
International Security Subcommittee,
of the Committee on Governmental Affairs,
Washington, DC
The Subcommittee met, pursuant to notice, at 10:32 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Peter G.
Fitzgerald, Chairman of the Subcommittee, presiding.
Present: Senators Fitzgerald and Akaka.
OPENING STATEMENT OF SENATOR FITZGERALD
Senator Fitzgerald. This Subcommittee hearing will come to
order. I would like to welcome our witnesses for being here
today.
Today, the Subcommittee is conducting a hearing on the
Financial Report of the United States and the accompanying
audit of the report conducted by what used to be known as the
General Accounting Office, but which as of yesterday has
officially been renamed the Government Accountability Office.
But it still has the same acronym, GAO. We congratulate the GAO
on their official name change.
The hearing also will focus on the financial management of
two departments: The Department of Defense, which was one of
three Federal agencies to receive a disclaimer in fiscal year
2003, and the Department of Homeland Security, which the GAO
listed on its high-risk list, citing a number of major
management challenges and program risks.
This administration and the Federal agencies are making
significant strides to improve their financial management. In
testimony before the House earlier this year, Comptroller
General Walker indicated that agencies made laudable progress
in expediting the preparation of their annual financial
statements. Mr. Walker noted that eight agencies submitted
their fiscal year 2003 financial statements in November, less
than 2 months after the close of the fiscal year.
In her House testimony, Ms. Springer indicated that the
administration's goal of shortening the time for agencies to
prepare audited financial statements from 5 months to 45 days
after the end of the fiscal year was achieved by a third of the
major agencies a year in advance of the new deadline.
Yet billions of American tax dollars are wasted by fiscal
mismanagement, fraud, and abuse. A review by the Congressional
Research Service of selected estimates of Federal Government
savings indicates that more than $55 billion could be lost each
year from improper payments paid by the Federal Government, the
lack of adequate financial and inventory controls at the
Department of Defense, and waste in other government agencies.
This staggering amount is greater than the gross national
product of over 80 countries around the world.
This is not a trickle of coins. It is a deluge of dollars
that is costing our government its fiscal integrity. Instead of
disappearing into the abyss of government balance statements,
this money should be equipping our troops in the war on terror,
or securing our homeland from attacks, or being used for any
other number of very worthy causes, or returned to the
taxpayers, for that matter.
For the seventh year in a row, the GAO was unable to audit
the Federal Government's fiscal year 2003 consolidated
financial statement for three primary reasons. First, serious
financial management problems continue to exist at the
Department of Defense. Second, the Federal Government is unable
to account for billions of dollars of transactions between
Federal Government entities. And third, the Federal
Government's process for preparing the consolidated financial
statements is ineffective.
The government's consolidated financial statement fails to
account for a $24.5 billion shift in net position. The amount
of this so-called plug in their financial statements is up from
a plug of $17 billion in fiscal year 2002. Imagine they just
come up with a number, and plug in $24.5 billion to make the
balance sheet match. In the private sector, a company with a
big plug in its financial statements probably couldn't get any
credit from a bank, nor would the Securities and Exchange
Commission ever allow such a company to sell its shares to the
public. Yet we apparently tolerate this kind of plug, amounting
to billions and billions of dollars every year, with our own
Federal Government.
In fiscal year 2003, 20 of the 23 Federal departments
covered by the Chief Financial Officers Act received an
unqualified or clean audit opinion on their financial
statements. The Department of Defense, the Small Business
Administration, and NASA each received disclaimers. A
disclaimer is given when an agency's financial records are so
unreliable that an audit simply cannot be conducted, and for
that disclaimer of the DOD, we have put up a chart showing the
inability to conduct an audit at the DOD because the books and
records are in such disarray that heads or tails cannot be made
of those statements.\1\
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\1\ The chart referred to appears in the Appendix on page 304.
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I commend Secretary of Defense Donald Rumsfeld for placing
financial management reform on his list of top ten priorities
at DOD. In fact, I remember talking to him on the day he was
sworn in. He is from my home State, and I thought, if anybody
is tailor made to bang heads together and get this problem
fixed, it is Secretary Rumsfeld. I know of no one tougher or
more qualified for that task. I shudder to think that if
Secretary Rumsfeld is having a hard time getting it done, how
are we ever going to get this done? It is such a monumental,
daunting challenge.
It is daunting because the Department has over 2,200
financial management systems, many of which are redundant or
are not integrated, and this has led the GAO to list DOD's
financial management and business system modernization on its
high-risk list every year since 1995.
Today, we will hear from the GAO about specific examples of
wasteful programs that are linked to DOD's financial
management, and we have a second chart that should give you an
idea of what these programs are. For example, the chart at the
end of the dais--and there are two of them, one so that the
audience can see over there and one so that Senators can see
over here--the chart highlights some of these examples.\1\
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\1\ The chart referred to appears in the Appendix on page 307.
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Failed business systems--apparently, DOD spent $179 million
on two financial accounting systems, and then decided that they
didn't work and just terminated the projects with no resultant
benefit to the taxpayers or the government. One-hundred-and-
fifteen million dollars on thousands of unused airline tickets
valued at up to $9,800 each. One-hundred-million dollars for
the failure to collect unpaid Federal taxes from DOD
contractors. Many people with contracts or companies with
contracts from the DOD were continuing to get payments on their
contracts even though they weren't paying taxes they owed to
the Federal Government. And $34 million annually required to
reconcile contract payments. DOD does not have an integrated
system, apparently, to reconcile contract payments with
contracts. Therefore, it is a labor-intensive process to issue
contracts and record then in the payment system.
In all, those examples total over $400 million alone.
In addition to lost dollars, inadequate financial and
inventory management also undermines DOD's operations and the
security of our troops, and for that, we have another chart at
the end of the dais. This chart reflects the GAO's findings of
pay problems in the Army Guard that impact morale and
retention; the inability to locate more than 250,000 defective
chemical and biological safety suits; improper granting of
security clearances; and the public sale of sensitive biotech
equipment.\2\
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\2\ The chart referred to appears in the Appendix on page 308.
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And now, beneath that sheet, we have on display an actual
chem-bio suit from the defective lot that the GAO found DOD had
distributed to combat soldiers, possibly to soldiers in Iraq,
as well as local law enforcement agencies. When the suits were
found to be defective, DOD could not recall all of them due to
insufficient inventory controls. Additionally, the next
generation of this chem-bio suit was available for purchase on
e-Bay for $3 when, at the same time, DOD was purchasing the
same suit for more than $200. Not only is this wasteful
spending, but this error places our soldiers and local law
enforcement officials at risk.
During the hearing by our full Committee in May of last
year, I asked Homeland Security Secretary Tom Ridge about his
plans to ensure sound financial management of his new
Department and he assured the Subcommittee that this was a top
priority. Since then, DHS has made significant progress in
integrating its 22 component agencies and implementing its
budget of $33 billion. We must, however, work to ensure that
Homeland Security does not evolve into another DOD, where audit
disclaimers are the norm and inventory controls are lacking.
Unfortunately, the first warning flags are waving on the
homeland security front. The Washington Post reported last
November that State and local governments had used Federal
homeland security dollars to fill perceived budget holes,
including procurement of janitorial services, rather than to
fund critical homeland security needs.
The Department of Homeland Security is the only cabinet
department not yet subject to CFO Act requirements, but is
required under the Accountability of Tax Dollars Act to prepare
and have audited financial statements. Last year, Senator Akaka
and I introduced S. 1567, legislation that would apply the CFO
Act to the Department of Homeland Security. The Senate passed
this legislation and the House is expected to pass its version
in the near future. We look forward to hearing from our
witnesses on their views regarding the importance of applying
the CFO Act to DHS.
Publicly traded companies are held to the highest level of
scrutiny and financial accountability in order to ensure that
accurate financial information is presented to shareholders.
The Federal Government should be held to the same level of
accountability and provide accurate financial information to
its shareholders, the American taxpayers.
This is not an idle exercise in arcane accounting
procedure. Every dollar lost to waste, fraud, or abuse or
mismanagement is a dollar that could have been used to fight
terrorism at home and abroad. Inefficiency makes us all less
safe.
Before we hear from our first panel, I would like to
recognize the Subcommittee's Ranking Member, Senator Akaka, for
an opening statement. Senator Akaka.
OPENING STATEMENT OF SENATOR AKAKA
Senator Akaka. Thank you very much, Mr. Chairman. I
appreciate you holding today's hearing to review the recent
Federal financial audits of the Departments of Defense and
Homeland Security. I also want to thank our distinguished
witnesses for their testimony and for the efforts they are
making in this regard. Mr. Chairman, I want to tell you that I
admire you for moving into this area and I want you to know I
am on your side.
Just a little over 3 months ago, the Armed Services
Readiness Subcommittee held a similar hearing. As that panel's
Ranking Member, I had the opportunity to discuss with
Comptroller General Walker the shortcomings in the financial
management systems at DOD. The General Accounting Office issued
its fiscal year 2003 audit of the government's consolidated
financial statement in February. Although noting progress with
Federal financial management activities, GAO has also found
continuing ``significant material weaknesses or deficiencies,''
in the government's consolidated statement for the seventh
consecutive year. Among the three top factors contributing to
these deficiencies are the serious financial management
problems in DOD.
Mr. Chairman, it is disturbing that little has changed at
DOD. Since 1995, the Department's financial management has been
on GAO's high-risk list and has failed to develop an enterprise
architecture blueprint for its business systems even though DOD
said the blueprint would be in place by March 2003.
To address these fundamental problems, the National Defense
Authorization Act of 2003 required DOD to develop and implement
a new financial management architecture and transition plan by
early 2004. To date, DOD does not have a blueprint. I am
hopeful that today's hearing will help the Department of
Homeland Security avoid the financial management problems and
resistance to change that plagues the Department of Defense.
Mr. Chairman, you and I have worked together to increase
the transparency, timeliness, relevancy, and usefulness of
financial information in the mutual funds industry to protect
investors. In a similar fashion, we understand that until the
agencies get their financial houses in order, the government
cannot manage effectively.
Congress and the American taxpayers have the right to know
how much Federal agencies spend on providing essential
services, how an agency has spent its appropriated funds, and
whether there are unspent monies left in the pipeline.
Capturing accounting data is the easy part. What is hard is
how to integrate financial data with management systems that
are flexible enough to adapt to changing goals and priorities.
You and I share the belief that our focus should be not only on
what has gone wrong, but on how we can move forward in a
constructive way to address the underlying problems.
In fiscal year 2003, the authorization for both the
Departments of Defense and Homeland Security totaled $487
billion, or 22 percent of the Federal budget. Given that
fighting terrorism and the war in Iraq will continue to
dominate other budget priorities, we must fully understand why
DOD and DHS are encountering difficulties in reconciling their
annual statements. Failing to do so will limit our ability to
make sound budgeting decisions in the future. Moreover, without
improving financial management systems, there will be further
incidents such as when the Bureau of Immigration and Customs
Enforcement at DHS imposed a hiring freeze because its
financial management system indicated current and projected
spending would exceed its budget.
We are faced with enormous financial challenges which
demand timely and accurate financial data in order to instill
accountability and ensure Federal programs are executed in the
most effective manner.
The establishment of DHS was the largest government
reorganization since the late 1940's. I commend DHS for meeting
the challenges of starting a new Department. However, the
consolidation of the legacy agencies into one Department has
resulted in a non-integrated financial management system which
puts the entire Department at risk.
I support putting DHS under the Chief Financial Officers
Act, which is why you and I introduced legislation last year to
do that. Widening the scope of DHS's financial regulations
would improve the agency's ability to manage effectively and
efficiently the inherited financial activities of its legacy
agencies and those unique to its new organization.
This is what we are looking at at this hearing. I want to
thank our witnesses and look forward to their testimonies. I
know you all will be helpful to us. And I want to thank you,
Mr. Chairman, again for this hearing and for what you are
doing.
Senator Fitzgerald. Senator Akaka, thank you very much.
I would now like to introduce our first panel of witnesses.
Our first witness on this panel is the Hon. David M. Walker,
Comptroller General of the United States. Mr. Walker began his
15-year term as the Nation's Chief Accountability Officer and
was appointed in 1998 as head of the U.S. General Accounting
Office, now referred to as the Government Accountability
Office. Through his role as Comptroller General, Mr. Walker
oversees the GAO's work to improve the performance and
accountability of the Federal Government, including measures to
improve the efficient use of taxpayer dollars.
Our second witness is the Hon. Linda M. Springer,
Controller of the Office of Federal Financial Management at the
Office of Management and Budget, the OMB. Ms. Springer was
confirmed in this position on March 31, 2003, after having
joined OMB in September of 2002. In her role as Controller, Ms.
Springer provides governmentwide leadership for strengthening
the financial management of the Executive Branch, including the
Improved Financial Performance Initiative of the President's
Management Agenda.
Our third witness is Donald V. Hammond, Fiscal Assistant
Secretary at the Department of the Treasury. Mr. Hammond has
served in this capacity since September 27, 1998, after serving
as the Deputy Fiscal Assistant Secretary since July 1996. In
his current position, Mr. Hammond is responsible for management
of the government's cash flow and the operation of
governmentwide financial accounting and reporting systems,
including the consolidated financial statements of the United
States.
Again, I would like to thank you all for being here today,
and recognize, please, that your prepared statements will be
submitted in the Subcommittee's official record of this
hearing, and please feel free to summarize your remarks off the
top of your head if you feel able to do that. If you could try
and keep your remarks to 5 minutes, we would appreciate it.
Comptroller General Walker, thank you.
TESTIMONY OF HON. DAVID M. WALKER,\1\ COMPTROLLER GENERAL, U.S.
GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Walker. Thank you, Mr. Chairman and Senator Akaka. It
is a pleasure to be back before you. I would like to thank both
of you at the outset for your support of the Human Capital
Reform Act of 2004 for GAO, which was signed by the President
yesterday. It is really going to help us and I appreciate your
support.
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\1\ The prepared statement of Mr. Walker appears in the Appendix on
page 45.
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I also would like to thank you for holding this oversight
hearing. Candidly, there is not enough oversight being done in
a number of areas. There is not enough attention being placed
on the importance of sound Federal financial management
practices, and I want to commend you and thank both of you for
taking time out of your very busy schedules to conduct this
hearing and be here today.
As you mentioned, Mr. Chairman, as in the six previous
years, or otherwise for the seventh year in a row, certain
material weaknesses in internal control and selected accounting
and reporting practices resulted in conditions that did not
allow the GAO to express an opinion on the consolidated
financial statements of the U.S. Government. We did perform a
number of audit procedures, and fairly extensive audit
procedures, in conjunction with the auditors of various
departments and agencies, but certain impediments were there
that have been there for a number of years that prohibited us
from being able to express an opinion.
While the Federal Government has not yet been able to
prepare auditable financial statements, the requirement imposed
by the CFO Act and others Acts for there to be annual audits
has yielded important results to date. We have seen continuous
improvement and significant progress with regard to the number
of agencies that have been able to achieve clean opinions on
their financial statements, but more importantly, we have seen
a continuous improvement among most Federal agencies in their
ability to generate timely, accurate, and useful financial
information to make informed decisions on a day-to-day basis.
In that regard, in fiscal 2003, as was the case in fiscal
2002, 20 of the 23 CFO Act agencies were able to obtain an
unqualified opinion on their financial statements. That is up
from six agencies in 1996. However, only 3 of those 20 agencies
met the more substantive definition of success in financial
management that has been agreed to by the Director of OMB, the
Secretary of the Treasury, and myself as Comptroller General of
the United States, namely that not only do you have a clean
opinion on your financial statements, but you have no material
control weaknesses, no major compliance problems, and systems
that provide for timely, accurate, and useful information to
make sound management decisions on a day-to-day basis. Only the
Energy Department, the National Science Foundation, and the
Social Security Administration met that more substantive test,
and I would like to congratulate and acknowledge the efforts of
all three of those agencies.
As you mention, Mr. Chairman, there are three major
impediments to the ability of the GAO to express an opinion on
the consolidated financial statements of the U.S. Government.
First and foremost, serious financial management problems at
the Department of Defense, which is the largest agency in the
Federal Government.
Second, the Federal Government's inability to fully account
for and reconcile transactions between various Federal
Government entities. And third, the Federal Government's
process for preparing the consolidated financial statements,
which can result in the plug that you referred to.
The fact of the matter is, significant progress is being
made on No. 2 and No. 3. Some progress is being made on No. 1.
But that is the big challenge and we are not going to be in a
position to express an opinion on consolidated financial
statements until the DOD issue is dealt with, and that is by
far the most complex challenge that remains before us.
Mr. Chairman, irrespective of where we stand on financial
management with regard to current and past activity engaged by
the Federal Government with taxpayer money, I think it is also
important that we start looking from a more strategic
perspective. There is a problem with regard to how the Federal
Government currently keeps score, both for accounting and
reporting standpoint and also from a budgetary perspective. The
simple fact of the matter is, if you look at the consolidated
financial statements of the U.S. Government as of September 30,
2003--and this chart shows various related numbers. There are a
lot of numbers up here, so I will try to hit the bottom line.
It will show you that since the beginning of the Republic
in 1789, we have run up about $7 trillion--that is a ``T'' as
in trillion, 12 zeros--in total debt, debt held by the public
as well as debt held by the ``trust funds,'' like Social
Security and Medicare. And yet what it doesn't show adequately
is that we have a number of significant commitments and
contingencies that we have already made that are not shown as
liabilities for various reasons but yet are very real, for
example, the difference between the projected cost in
discounted present value dollar terms of Social Security and
Medicare and the amount of payroll taxes and other premiums
that we expect to receive.
If you look at how much money we would have to have today
invested at Treasury rates to deliver on the promises that have
already been made, it is really not $7 trillion, it is more
like $42 trillion. That is over three-and-a-half times the
entire economy, about 18 times the current Federal budget, over
$140,000 for every man, woman, and child in the United States.
Senator Fitzgerald. Isn't it $32 trillion?
Mr. Walker. Forty-two trillion plus.
Senator Fitzgerald. Forty-two?
Mr. Walker. That includes the $7 trillion. And of that $42
trillion, roughly $27 to $28 trillion is Medicare, and of that,
roughly $8 trillion is the new prescription drug benefit.
So the bottom line is, we have a number of commitments and
contingencies that already exist that we are going to have to
come to grips with, and the way that we look at things from a
budgetary standpoint is problematic because 10-year horizons
are simply not adequate given the demographic challenges that
we face. This chart represents the result of the most recent
long-range budget simulation by GAO, which shows that we face
large and growing structural deficits due to a number of
factors, including known demographic trends and rising health
care costs.
And in the final analysis, Mr. Chairman, the Congress is
going to have to review and reform basic entitlement programs,
look at the base of discretionary and other spending, and look
at tax policy in order to close this gap. But that is going to
take a concerted effort by a variety of parties over a number
of years.
So in summary, Mr. Chairman, progress clearly has been
made, in large part due to the acts that Congress took in the
1990's to legislative important management reforms, not just in
the financial management area but other areas, to bring good
management practices, if you will, to the Federal Government.
Progress has been made. It is continuing to be made. The big
challenge is the Department of Defense. We are committed to
doing our part to try to help, not only deal with financial
management challenges, but also the imbalances that lie before
us, and I look forward to working with you, Senator Akaka, and
others to address these challenges.
Thank you, Mr. Chairman.
Senator Fitzgerald. Thank you, Mr. Walker. Ms. Springer.
TESTIMONY OF LINDA M. SPRINGER,\1\ CONTROLLER, OFFICE OF
FEDERAL FINANCIAL MANAGEMENT, U.S. OFFICE OF MANAGEMENT AND
BUDGET
Ms. Springer. Thank you, Mr. Chairman and Senator Akaka. I
am happy to be here today with you to discuss our Financial
Report of the U.S. Government for Fiscal Year 2003 and other
related financial management issues. I look forward to sharing
with you some of the significant progress made by Federal
agencies during the past year that underlies that report and
positions it for the future.
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\1\ The prepared statement of Ms. Springer appears in the Appendix
on page 89.
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Financial management extends beyond receiving an
unqualified audit opinion. Integrity and reliability, the
things to which a clean audit attests, should be a given. First
class financial management requires the integration of the
financial impact of an agency's activities into the
operational, execution, and senior management decisionmaking at
an agency, just like it does in the private sector. It is
accompanied by accountability standard setting, performance
tracking, and other analyses. These are among the
characteristics we should seek in the Federal Government, every
bit as much as we do in the private sector.
Only a few short years ago, such a standard was not
prevalent in the Federal Government. Through the President's
Management Agenda, the Office of Management and Budget has set
what many view to be very aggressive goals to achieving
respectability in the government's financial management
practices. It is not surprising that this results-focused
approach, while acknowledged to be a positive influence, has
forced significant and challenging process modifications at
many agencies. The degree of transformation reflects just how
far we have had to go to catch up to accepted practices of
well-run financial management organizations in the private
sector.
So the question is, are these efforts that we describe
paying off? Well, the answer is an indisputable yes. Where it
took agencies 5 months to prepare audited financial reports in
the past, it now takes 45 days for many and only 2\1/2\ months
for most. Agencies are building on momentum from our fiscal
year 2003 reporting acceleration successes to achieve the
mandatory November 15 reporting date for fiscal year 2004.
Interim financial reports were unheard of before 2002 and they
are now being completed by 21 days after the close of each
calendar quarter.
It is often said that these achievements are only achieved
by--or these accomplishments are only achieved by heroic
efforts, and hard work is always a factor, but these results
are really a tribute to detailed planning, to effective
management, and excellent execution.
While the acceleration targets are critical, they are not
our ultimate objective. Rather, the discipline and improved
control needed to accelerate financial reporting is only the
foundation for ensuring the availability of useful financial
information. The incorporation of timely and accurate financial
information into management decisionmaking and operational
assessment continues to be our main goal.
Progress toward this goal during fiscal 2003 was shown by
the addition of two agencies, the Social Security
Administration and Environmental Protection Agency, that
achieved green status under the financial initiative of the
President's Management Agenda. These agencies were later joined
by the Department of Education in the first quarter of 2004.
Today, not only do the managers in these agencies have timely
and accurate information, but they are using it for their
program assessment and for their planning.
I wanted to say here that if you have accurate and timely
financial information, and you really need to have both, you
are able to do those things. If you have accurate information
but it is too late to use it, then it is worthless. If it is on
time but it is inaccurate, you had better not be using it. So
you really need to have both accurate and timely information.
We believe that meeting timely reporting standards and getting
clean audits is evidence that the agencies will have that
information for their management and their decisionmaking.
The mandatory financial reporting date of November 15 will
require much work from the agencies this year. However, this
accelerated deadline is an attainable goal, shown by the large
number of major agencies, over 75 percent, that were able to
report their financial statements by the end of December last
year. So they have made significant progress. They have a
little bit further to go. In those cases, strong agency senior
leadership, careful planning, innovative thinking, and focused
efforts were all necessary elements for success.
This fiscal year, we are meeting regularly with each CFO of
the agencies as well as their IGs to review plans for hitting
their November deadlines. Clearly, some agencies have more
challenges and obstacles than others, but all agencies are
expected to take necessary steps to meet the accelerated date.
Some of the best practices that agencies are implementing
include disciplined processes and audit schedules, aggressive
tracking and issue resolution in risk areas, reengineering of
their financial reporting processes and their audit processes,
early and frequent communication with their auditors from that
opening conference on day one at the beginning of the year
right on through, and focused financial management priorities.
So we will continue to work and we meet with the high risk
agencies on a monthly basis from now right up through November
15.
There are some emerging issues that I would like to share
with the Subcommittee briefly. Internal control--the internal
control environment of any entity is an area of focus both for
management and for the auditor, and the agencies of the Federal
Government are no exception. There are several existing laws
that govern agencies in assessing and representing the quality
of their internal control. However, not all agencies are able
to provide the positive assurance that goes with those
requirements. But all continue to make progress in eliminating
barriers to compliance. Many of these are longstanding system
issues that will take a period of years to require full
remediation.
However, what you should know is that both OMB and the CFO
Council and the Inspectors General are working together today
to review the internal control challenges and what the best way
is to close the gap between where we stand today and a
Sarbanes-Oxley type of management control environment.
The other issue I would like to bring to your attention in
the emerging category is related to unfunded liabilities and
social insurance scrutiny. As mentioned by Comptroller General
Walker, this is an area of high concern and FASAB, the Federal
Accounting Standards Advisory Board, has taken some steps
already to increase audit scrutiny and the prominence of the
social insurance statements within the Government's
Consolidated Financial Report. So in the future, you will see
that in a more prominent position in the statement. It will
become one of the basic statements and it will receive full
audit scrutiny. So that is a step toward having information
that is certified in a way that we can make the right policy
decisions about funding.
So our outlook for the future, to summarize, is that we
have seen many achievements in the past year, but there remains
a long way to go. We will continue to set and achieve higher
standards of performance dealing with issues like asset
management, elimination of improper payments, and many other
areas that we believe to be fertile ground. It is our opinion
that the Federal Government should be held to as high, if not a
higher, standard than financial management in the private
sector, and I was happy to hear you, Mr. Chairman, say the same
thing.
American citizens don't have the option of taking their
investment elsewhere. They have to pay their taxes. So we owe
them the highest level of scrutiny and management of the
taxpayer dollars that they have entrusted with us. We believe
it is incumbent on every financial professional in the
government to execute their duty according to those standards
of excellence, and that is what we are striving to do. We have
made some progress and we are going to continue on that path.
Thank you.
Senator Fitzgerald. Ms. Springer, thank you very much. Mr.
Hammond.
TESTIMONY OF DONALD V. HAMMOND,\1\ FISCAL ASSISTANT SECRETARY,
U.S. DEPARTMENT OF THE TREASURY
Mr. Hammond. Mr. Chairman, it is my pleasure today to
represent the Treasury Department to discuss the status of the
Federal Government's financial reporting, and in particular the
Financial Report of the U.S. Government. We have come a long
way in the 7 years that we have prepared this report, but we
face some significant challenges, and as such, the financial
report is indeed a work in progress. My written testimony today
explains more fully the challenges we face.
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\1\ The prepared statement of Mr. Hammond appears in the Appendix
on page 95.
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The Committee's interest today, however, is very important
because this is an area, as the Comptroller General has pointed
out, that needs continuing scrutiny. The Treasury Department
has a longstanding responsibility and commitment to report
accurate and useful information about the Nation's finances.
Our objective in preparing the consolidated financial
statements is to provide the Congress and the public with a
reliable, consistent, timely, and useful report about the costs
of the government's operations, the sources used to fund them,
and the implications of its financial commitments.
I am pleased that last year, we were able to release the
report a month earlier than in prior years. That accomplishment
is due in large measure to the progress that the agencies have
made in accelerating their financial reporting. For the 2004
statements, as you have already heard, OMB has requested that
the agencies prepare statements by November 15 and the
governmentwide statements will be issued by December 15, based
on those agencies' submissions. This more timely preparation of
the Consolidated Report means that the financial information
will be available prior to the release of the President's
budget and providing actual data on an accrual basis for
reference in those discussions.
The financial report is an important addition to Federal
financial reporting. It provides an across-the-board look at
the Federal Government, computed in accordance with accrual
accounting standards established by independent Generally
Accepted Accounting Principles, or GAAP. The report goes beyond
simple reporting of results, as it displays the effects of all
significant assets, liabilities, stewardship responsibilities,
and other commitments and responsibilities. The considerable
financial implications of the government's social insurance
programs--Social Security and Medicare in particular--are
reported in the stewardship accounting.
The report is subject to audit by the GAO, and although the
report has improved over the years as we have strived to make
it more useful, the GAO has been unable to render an opinion on
the financial statements. For the 2003 report, as has been
noted today, GAO cited three principal reasons for the
disclaimer. As the next panel will no doubt discuss, the DOD
has displayed a strong commitment to correct its extensive
financial management problems through a comprehensive financial
management modernization program. Therefore, I will focus my
remarks on the two other material weaknesses.
We have a number of initiatives underway to resolve the
material weaknesses and to improve the government's management
and accountability. The Financial Management Service,
Treasury's bureau responsible for governmentwide accounting
operations, is making real progress. We have been focusing on
the problem of intergovernmental activity and balances and are
devoting much attention to help agencies fully reconcile these
areas through the development of a new analytical tool and
increased reporting frequency. I am optimistic that the
reporting for the quarter ended June 30 will show significant
further improvement.
However, I must note, there is not a single centralized
system solution to the problem of intergovernmental balances.
Each agency's management must make it a priority to improve the
agency's data quality, reconcile amounts with their trading
partners, and adhere to the standard business rules issued by
OMB for processing intergovernmental transactions. This is
basic to accurate and consistent financial reporting.
With regard to the report preparation weakness, we are
addressing each of the three aspects. For the unexplained
transactions that affect the change in net position and that
require us to use a reconciling entry, or plug, in the
financial statements, we believe the larger problem has its
roots in the intergovernmental balances, but we are also
employing other analytical techniques because we believe that
there may be some activity related to custodial revenues
reported by the agencies.
As a result, we are taking those various components apart
and hoping to be able to understand more fully the causes of
that issue as we understand the intergovernmental balances, as
well as how certain custodial revenue may be reported.
As to the need to directly link agencies' audited financial
statements with the data used for compiling the governmentwide
reports, FMS is completing the implementation of a new closing
package system. This new system will provide a clear audit
trail that will facilitate the audit of the financial report
and demonstrate that it is consistent with the underlying
information in agencies' audited financial statements. We are
also addressing the process to ensure that the notes or
disclosures in our report are in compliance with GAAP.
In summary, I look forward to meeting the new due dates
this year, but I recognize the difficulties involved. We are
dealing with a new central reporting process and are working
with agencies whose financial reporting is not yet where it
needs to be to meet these dates. That being said, I visualize
the day when we have fully achieved more timely reporting and
can obtain the full value of financial reporting by having
reports that are truly useful. Usefulness is the final element
of effective financial reporting. Financial reports should
provide relevant financial and performance information that not
only supports management decisionmaking, but also informs the
public. Herein lies the greatest challenge and potentially the
greatest benefit from our financial reporting.
We have come a long way. Our upcoming challenges are
significant, but manageable, and I am confident that we will
continue to see real progress. Thank you, Mr. Chairman, and
that concludes my remarks.
Senator Fitzgerald. Thank you. I want to start with a
question that takes a little bit of heat off of the Executive
Branch of Government. Mr. Walker, right now, there are no
audits of the Legislative or Judicial Branches of Government,
are there?
Mr. Walker. Well, there are audits of many Legislative
Branch entities. For example, GAO has an audit. Several of the
other Legislative Branch agencies also have audits.
Senator Fitzgerald. Does the Senate or the House have an
audit?
Mr. Walker. It is my understanding that the House does have
an audit. The Senate does not have an audit. However, the
Senate is trying to take steps right now to explore the
possibility of voluntarily doing an audit, even though they are
not required to by law.
Senator Fitzgerald. How about the court system?
Mr. Walker. No. They are not required, and I think the
Administrative Conference of the Courts is obviously the entity
that is the most logical one to take a look at, if Congress
decides to pursue such a requirement.
Senator Fitzgerald. Since nobody is auditing that co-equal
branch of government called the Judicial Branch, it is just not
being audited?
Mr. Walker. That is my understanding, Mr. Chairman.
Senator Fitzgerald. And the Senate and the House, the House
is maybe auditing itself? Do you get to review those audits or
comment on those?
Mr. Walker. They are not material to the consolidated
financial statements. I mean, we have the ability to do it. We
do not perform that audit ourself, and for a variety of
reasons, I don't think it would be appropriate for us to do
that.
Senator Fitzgerald. Maybe because we control you.
[Laughter.]
Mr. Walker. It would be challenging to audit individual
offices of Senators and Members of Congress. Let us just say
that would be something we would prefer not to have to do
directly ourselves.
Senator Fitzgerald. I understand. Let me ask you this about
the consolidated financial statements of the U.S. Government.
Do you put figures in there representing the Legislative and
Judicial Branches of Government?
Mr. Walker. That is correct. We do, Mr. Chairman.
Senator Fitzgerald. And where do you get those figures?
Mr. Walker. We get them based on information that they
report. I mean, many entities will report information, but that
information may not be audited.
Senator Fitzgerald. OK.
Mr. Walker. And Don may want to comment, since he is
responsible for the consolidated financial statements.
Mr. Hammond. What we use is primarily the budgetary
information for those three entities, combined with the audited
financial reports for the components of the Legislative Branch
that do prepare statements, such as the General Accounting
Office, or, I am sorry, the Government Accountability Office--
it will take me a little while to get used to that one--as well
as the Library of Congress.
The Administrative Office of the U.S. Courts for the
Judicial Branch is a particular challenge, because even there,
the extent of the budgetary information is even more limited
than what we receive from the Legislative Branch. We don't
believe that those are particularly material balances. That
being said, we would like the report to be complete and we
would also like to be able to establish the significance of
those amounts.
Senator Fitzgerald. At future hearings, perhaps, this
Subcommittee, I hope, will take up that issue.
Are you putting accrual figures in this consolidated report
for unfunded liabilities? Is it appropriate to say that this
report is prepared in conformity with accrual accounting?
Mr. Walker. It is based upon accrual concepts, and I think
it is important to note that substantial progress has been made
over the last several years to enhance the transparency and
also the accountability associated with some big numbers, for
example, Social Security and Medicare commitments. I am pleased
to say that several years ago, the Federal Accounting Standards
Advisory Board created a separate statement that included
discounted present value numbers for these programs for the
first time. They subsequently made it a primary financial
statement, or basic financial statement, and it is now going to
be subject to audit. So that is tremendous progress, if you
will, and it is using accrual concepts, which I think is
important.
Senator Fitzgerald. And are you looking at the assumptions
used in coming up with those accrual numbers and checking them
to make sure that they are reasonable?
Mr. Walker. We look at the methodology that is employed,
whether or not that methodology is generally accepted. We look
at the reasonableness of the assumptions. And as you know, Mr.
Chairman, in the case of Social Security, Social Security
Administration is audited, I believe, by
PriceWaterhouseCoopers, and in the case of CMS, which is
responsible for Medicare, I believe they are also audited by
PriceWaterhouseCoopers.
Senator Fitzgerald. That is where those unfunded
liabilities are--it is PriceWaterhouseCoopers for the Social
Security unfunded liability. Are they coming up with that
number?
Mr. Walker. They are working with the actuaries for the
Social Security Administration as well as the actuaries for the
Center for Medicare and Medicaid Services.
Senator Fitzgerald. OK.
Mr. Walker. They need to satisfy themselves, and we
obviously have to satisfy ourselves to the extent that we are
going to be in a position to express an opinion. But as I
mentioned before, unless and until the Department of Defense
gets its act together, and they are working hard to try to do
that, we are not going to be in a position to express an
opinion on the consolidated financial statements.
Senator Fitzgerald. OK, and I will get to the Department of
Defense in a moment, but in your consolidated financial
statement, I think there is some point at which you discuss the
explicit debt per American, our national debt per American, and
I think it is some $7,000. But then when you factor in the
unfunded liabilities, the debt per American citizen is really
closer to $100,000.
Mr. Walker. Well, it depends on how you look at it, Mr.
Chairman. Using the most up-to-date numbers, if you look at the
per capita burden, if you will, and that is what I would call
it, a burden, per American based upon the total debt, which is
around $7 trillion as of this point in time, that is about
$24,000 for every man, woman, and child in the United States.
If you add on top of that not just the results of historical
activity but also what the difference is between how much we
have promised and the revenues that we have dedicated to meet
those promises for things like Social Security and Medicare and
you calculate the gap today, the burden goes from about $24,000
per person to over $140,000 per person.
Senator Fitzgerald. Over $140,000?
Mr. Walker. That is correct.
Senator Fitzgerald. OK. And you are not talking per family,
you are talking per person?
Mr. Walker. Including the newest newborn.
Senator Fitzgerald. So that is a big number. Now, with
respect to the DOD, what are we going to do about the DOD? This
is apparently just a humongous problem that we are having a
hard time getting our arms around. I remember Secretary
Rumsfeld when he first inquired about this issue when he first
took over, even before he was sworn in. I think he had talked
to the accounting people at DOD, and they had told him that
their accounting system was designed not really to do financial
accounting, but it was more designed so that they could tell
Members of Congress what projects they were doing in each of
their districts. It was a whole mess, and the whole system
needs to be revamped.
Ms. Springer, in your judgment, are we making progress
there, and how long will it take? This has been going on a very
long time now, since the requirement of audited financials was
put in place. Was that 1995?
Ms. Springer. Ninety-six.
Senator Fitzgerald. Ninety-six. So we are talking 8 years
or so. We still can't get it right. When do you think we will
be able to get it right at DOD?
Ms. Springer. I don't know what the date is, and I would be
interested in what your next panel tells you the date is, and I
hope you ask them that same question----
Senator Fitzgerald. They are going to be asked, yes.
Ms. Springer. But what I believe is going on there at DOD
and where I think they should head next is the following. There
is a huge effort, their overall business modernization program
that I am sure they will tell you more about. But what doesn't
get much publicity is some of the smaller issues and efforts
that deal with specific line items, for example, on their
balance sheet.
One area--88 percent of their liabilities, I believe, or
somewhere in that range--deals with post-retirement benefit
liabilities. They have gotten, I think, roughly half of that to
the point where it would get a clean opinion, if it were
subject to an audit today. That kind of thing doesn't make the
headlines, post-retirement benefit liabilities and the opinion
on that. But they are working through various line items on
their balance sheet at the same time that they are doing this
huge, mammoth, overall reengineering process.
We believe that filling the under secretary position, CFO
position, comptroller position at the Department of Defense is
critical for that effort to get back on track, in my view, and
continue to make progress.
Senator Fitzgerald. That position is vacant now?
Ms. Springer. There is a nominee that has not been
confirmed, and we believe there is a leadership issue. They can
have all the project managers in the world on this project----
Senator Fitzgerald. How long have they had that situation?
Ms. Springer. Since Dr. Zakheim left, I think, roughly in
the spring. And I don't know what the prospects are, but I
believe that when you have a leadership void, if you will, or
an empty slot in a very key position, and Dr. Zakheim gave very
significant motivation and leadership there, forcefulness, I
think that the project suffers, frankly.
Senator Fitzgerald. So right now, they are without a
general in their war on cleaning up their accounting mess.
Ms. Springer. You can ask them if they feel that way----
Senator Fitzgerald. OK.
Ms. Springer [continuing]. But I believe that it has an
impact.
Senator Fitzgerald. OK.
Ms. Springer. I also believe that the Department needs to
take a step back and carve out some pieces of that effort,
maybe certain components or certain projects or certain issues
to work at in a more concentrated way with their auditor and
their Inspector General to try and make progress on those
smaller pieces. It is a huge mountain to move and I think that
is why it is difficult to show progress. I think it would be
helpful to pick certain components where you can maybe get some
hits.
Senator Fitzgerald. Does OMB lean on the DOD in this area?
Ms. Springer. I am working right now with other parts of
OMB, the ``B'' side of the house, if you will, to come up with
some recommendations and we plan to meet with DOD shortly. This
would be news to your second panel that we are starting to
think this way.
Senator Fitzgerald. OK.
Ms. Springer. It is not to take any emphasis off their
existing project, but we believe that maybe some sub-segments
of that might be helpful to address.
Senator Fitzgerald. Now, Mr. Walker, if DOD were at least
able to get a qualified opinion, would that enable you to do a
consolidated financial statement that would be auditable?
Mr. Walker. Depending upon the nature of the qualification.
If they could get to a qualified opinion and we could get
comfortable as to the basis for that qualified opinion, that
could put us in a position to issue a qualified opinion on the
financial statements as a whole. I doubt very seriously that if
they have got a qualified opinion that we would get to the
point of being able to issue an unqualified opinion on the
overall financial statements.
I would say, if I can, Mr. Chairman, I think this is very
important, since DOD is really the biggest challenge that we
face, several comments for your consideration and Senator
Akaka's. I think it is going to take several things to get them
to where they need to be.
First, they have to have commitment from the top and it has
got to be a priority----
Senator Fitzgerald. Do you think that commitment is there
at the Secretary's level?
Mr. Walker. Yes. I do believe it is there and I want to
note that for the record. I do believe the Secretary is
committed. I do believe that the key players who are in place
are committed. There are, however, some critically vacant
positions right now. For example, the Under Secretary and
Comptroller position is vacant. Without the person who is on
the point, responsible and accountable, you are not going to
make much progress, quite frankly.
Second, I think they are going to need some additional
resources. They are going to need some new talent within DOD.
They are also going to need some contractor assistance to be
able to get this done. They also need to complete a plan for
how they are going to get from where they are today----
Senator Fitzgerald. Couldn't they have just contracted out
this whole thing to fix this?
Mr. Walker. Well, in theory, you could, but there are a
number of major challenges there. There are independence
issues. There are so many of the major firms that have done
work in the Department of Defense in the financial management
area that they may not be deemed to be independent under
Generally Accepted Government Auditing Standards, and we are
working in a constructive way with the Inspector General, who
is assuming responsibility for this audit and who will have
significant contractor assistance, to help sort through those
issues.
There is no way that the IG can do it by themselves, and
quite frankly, it would be difficult for any one firm to do it
by themselves because the DOD is one of the largest and most
complex entities on the face of the earth, if you looked at it
as a separate enterprise by itself. But they have to have a
plan, and on that plan to recognize that they are going to go
from no opinion to a qualified opinion to an unqualified
opinion. In that regard, they should do it in a matrix fashion.
By that I mean, recognize that they need to look at various
entities or units, and try to get clean opinions on certain
units, and then they need to look horizontally on functional
activities and line items, as was mentioned, to try to get them
to where they need to be.
Senator Fitzgerald. Would you be able to suggest what parts
of DOD are particular problems in this regard, or do you have
an idea?
Mr. Walker. Well, frankly, their problems are pervasive.
They have problems from the standpoint of the asset side. They
have problems from the standpoint of the liability side.
Controller Springer just noted the fact that they are making
progress with regard to post-employment obligations. That is a
huge number on the balance sheet. But we need to make some
progress on the asset side.
Two other things real quickly, Mr. Chairman, and that is
they have to have the resources. Congress is working to provide
those resources, but they have got to have the plan to
effectively use those resources to make sure there is not waste
and that they get real results. They need to modify their
performance management systems to link the ratings of the key
people with the results that we are trying to achieve.
And lastly, there needs to be ongoing and effective
oversight. Frankly, this, until recently, has not been a
priority for the Department but it is now. As you know, DOD has
9 of GAO's 25 high risk areas.
And the last thing I want to mention on this, I believe
very strongly if we are going to solve the basic management
problems at DOD, we need a Chief Management Officer at DOD who
is a level two official, who is a pro, who has a proven track
record for success, a term appointment, a performance contract,
who will take a more strategic integrated and innovative
approach not just to financial management but to the enterprise
architecture, the logistics systems and things of that nature.
The absence of having a pro who has got a proven track record,
who is going to be there long enough to get it done, at the
right level, has been a huge impediment and I question whether
we are going to be successful without it.
Senator Fitzgerald. And maybe we need to pay that person an
extraordinary amount--I am thinking, why is somebody who is
qualified to do that actually going to want to come in and take
over that headache?
Mr. Walker. I actually believe that there are persons who
would do it for their country because it would be a huge
challenge. And it may be somebody, for example, that retired
early out of the private sector, hopefully with some prior
public sector experience, who has made money and wants to do
something for their country.
The problem is that without that person who is responsible
and accountable, who has got a proven track record, who is
going to be there long enough and is at the right level to get
the job done, I question whether we are ultimately going to
effectively address not just this area, but frankly, a whole
range of high risk areas within DOD.
Senator Fitzgerald. Thank you. Senator Akaka.
Senator Akaka. Thank you, Mr. Chairman.
Mr. Walker, as always, I have enjoyed working with you and
talking with you.
Over the years, you have made an impressive case for
financial transparency and accountability in the Federal
Government and you have just given us some idea as to what
needs to be considered to begin this kind of change which
should start from the top level. Unless we do that, then we
can't begin to make changes.
You have long stated that the key to breaking down
parochial interests and stovepipe approaches would be
establishing mechanisms to reward organizations and individuals
for behaviors that comply with DOD-wide and Congressional
goals. Unfortunately, we continue to see a lack of progress in
this area.
Let me follow up on Senator Fitzgerald's question. Has the
Department set up the necessary mechanisms to reward
organizations and individuals for working toward overall
financial management goals in a coordinated manner, and if not,
what can we do to move DOD in that direction?
Mr. Walker. Well, Senator, first, they have taken some
steps, but they need to take many more. As you know, DOD
achieved enactment of the National Security Personnel System
Reform Act, which will give DOD the ability to modernize and
design new human capital policies and performance management
systems in ways that they have not been able to in the past.
I think it is important that we recognize that this is a
challenge not only at the senior executive level, not just for
the political appointees, but also for the career civil
servants and that key changes need to be cascaded down through
all levels of the organization. We need to define what we are
trying to achieve, what are the measures of success, what are
the key milestones, and then to be able to link institutional,
unit, and individual performance measurement reward systems
with those desired outcomes and key milestones.
If you do that, it will have a powerful impact. But in
order to be able to do it, you also have to have not only the
plan and the infrastructure in place, you have got to have the
leader who is going to be there long enough to get the job
done. And from a practical standpoint, historically, there is
frequent turnover in key leadership positions and this is a
multi-year task, there is no doubt about it.
Senator Akaka. Ms. Springer, let me follow up on my
question to Mr. Walker. Since linking goals and performance
measures are key components of the President's Management
Agenda, would you please comment on Mr. Walker's response and
discuss how OMB is working with the DOD on this problem.
Ms. Springer. From a general standpoint of linking
performance and results to budget, for example, we have, as you
know, our PART process at OMB that now is working through--has
been generally accepted, I think, by all of the agencies to
align our budget requests and the strategies of the agencies to
performance of programs so that the demonstration of results
has really become the ultimate test in whether or not taxpayer
dollars should be reinvested in programs. Are they succeeding?
Are they getting the benefits that were expected and promised?
To the extent that we are talking about human capital
issues, which I think was your specific question, I believe
that also comes within that scope of the PART and also is a
part of the President's initiative with respect to human
capital, one of the five initiatives under his management
agenda. But there is an overall support by the administration
for results-based compensation. The Human Capital Performance
Fund, I think, was an initiative of the administration,
certainly in that area, and we remain committed to that.
Senator Akaka. Mr. Walker.
Mr. Walker. As you probably know, the Office of Personnel
Management has the lead on human capital issues under the
President's Management Agenda. In that regard, they just hired
one of our senior executives to try to help work with DOD on
some of these issues and we at GAO are trying to work in a
constructive fashion with Navy Secretary England, who Secretary
Rumsfeld has designated as a point person on the NSPS design
and implementation, to try to share knowledge and best
practices in a constructive way without compromising our
independence.
Senator Akaka. Thank you, Mr. Walker. Mr. Hammond, I would
like to thank you for your attention to improving the financial
reporting of Federal agencies. I am also interested in the
governmentwide Accounting Modernization Project, which is, I
understand, now underway. I understand that GWA enables
agencies to process certain transfers and transactions without
having to complete burdensome paperwork.
My question to you is, since GAO has identified intra-
agency transfers as one of three impediments to consolidated
financial statements, what safeguards are built into GWA to
ensure that the convenience of this project does not compromise
the security of financial information and become a mechanism
for waste, fraud, and abuse?
Mr. Hammond. The GWA project is really an exciting
opportunity to totally change the way we are going to do
budgetary accounting. It is the capability and the long-term
vision to build a web-based system so that agency financial
information from the budgetary operations will flow
automatically into the central accounting systems. It is the
primary way of solving a number of the issues that today we are
trying to clean up after the fact as they deal with budget
authority, budget transfers, and that level of
intergovernmental activity.
What it is going to do is, and certainly the phases that
have been implemented already have effectively done, is allow
an agency to enter a transaction once, not only complete the
transaction but carry out the accounting related to that
transaction at the same time, thereby posting the balance
consistent with the transaction itself, eliminating the need
for clean-up activity after the fact, removing the potential
for mispostings or misclassification after the fact as someone
is trying to do the accounting subsequent to the transaction.
It really will, once fully enforced, provide us with an
opportunity to get rid of amazing numbers of reconciliation
activities across the agencies. It is, though, however, that
level of fundamental change that is going to take some time,
because the agencies, in fact, have to be prepared to provide
the feeder data into the system at the same time.
As for the security of the system, we have built it around
a fairly robust Internet IP platform. Because these are not
actual financial transactions in the traditional sense--there
is not money leaving the government--the level of security is
consistent with the risk involved. This doesn't trigger
spending. This is reporting on moving budget authority from
pocket A to pocket B, for example, with regard to transfer
activity.
Senator Akaka. Mr. Walker, as you know, the Department of
Homeland Security is not subject to the Chief Financial
Officers Act and, therefore, is not required to implement and
to maintain financial management systems that comply with the
governmentwide standards. Also, its Chief Financial Officer is
not confirmed by the Senate. As an original cosponsor of the
1990 CFO Act, I believe this law continues to offer a firm
foundation on which agencies should build their financial
management practices.
My question to you is, what impact do you believe the
exemption from the CFO Act has had on the financial situation
at DHS?
Mr. Walker. Well, as you know, while they are not covered
by the CFO Act, they are covered by certain other acts which
require them to have audited financial statements.
I think to a great extent, this is a philosophical issue.
The Department of Homeland Security is one of the largest
Department in the Federal Government. It is on our high-risk
list as it relates to the integration and transformation of
that Department. It has significant responsibilities that are
of importance to all Americans, and it has a tremendous amount
of financial resources. From an intellectual standpoint, it is
hard to see why the Department of Homeland Security would not
be covered under the CFO Act.
With regard to the confirmation issue, if I might add,
Senator Akaka, GAO and I myself as Comptroller General have
testified, are there certain agencies that I believe could
benefit from this chief management official--chief operating
officer, whatever you want to refer to the title--and I think
to the extent that position is in place, Congress needs to
consider whether and to what extent the positions that would
support to this chief management official should be Senate
confirmed.
I think it is very important that there be statutory
qualification requirements for these persons and that they be
presidential appointees, but I think that if we can get the
right type of person at the level two level, as the chief
management official with a term appointment and a performance
contract, with a proven track record, you might want to
reconsider which positions below that level should have Senate
confirmation. That doesn't mean they wouldn't have visibility.
That doesn't mean they wouldn't be presidential appointments.
That doesn't mean they wouldn't have statutory qualification
requirements. Those things, I think, are important. But you
have a lot of work to do on confirmations and I think you
should always be looking at how many positions should be
confirmed versus not.
Senator Akaka. Thank you for your response.
Senator Fitzgerald. Would Ms. Springer have a response on
that----
Senator Akaka. Yes.
Senator Fitzgerald [continuing]. What she thinks about
applying the CFO Act to DHS? It is the only cabinet agency that
doesn't have that requirement.
Senator Akaka. I certainly would like to hear from Ms.
Springer.
Ms. Springer. Thank you, Mr. Chairman. I share some of Mr.
Walker's comments from the standpoint that I believe that DHS
has acted and carried out its duties very much as it would if
it were a CFO Act agency. I don't think you would see much
difference in the sense that they have embraced the audit
requirement. They didn't seek the waiver that they could have
under the Accountability for Tax Dollars Act. And they have
worked very diligently to do all the things that a CFO Act
agency would do. So in our minds, there is no distinction.
I would like to comment in particular on the confirmation
aspect, the requirement. Certainly, the administration has put
forward a model at DHS for management, the management
structure, and it is a little different than what was
envisioned under the CFO Act. The thing that I think concerns
me, though, particularly about putting DHS under the CFO Act
would be that the CFO would be required to go through that
confirmation process, which has cost the administration, just
this administration, somewhere in the neighborhood of 5 to 6
years of lost time of nominees in that waiting position where
they have been--this is after the--in addition to, I should
say, all of the clearance that the White House Personnel Office
does.
So from the time when that person is first identified, all
of the White House clearance, FBI checks and all of that, and
then the Senate confirmation process, just from that point has
been about 6 years of lost time. With CFOs that have already
served, even just as recently as within this administration
moving to other departments, in one case, 6 months for that one
individual that already had a track record, who was already
confirmed by this Senate.
So it becomes very frustrating for me to try and get them
to make these management improvements that we are all
interested in when they are in that holding pattern. So that is
the thing that I have the strongest reservation about
personally. But to answer your question, I think that the
agency has acted in every respect as it would if it were under
the CFO Act.
Senator Akaka. Mr. Walker.
Mr. Walker. If I can, Senator, and I have never said this
before, I am just thinking out loud here, if the Congress were
to move in selected departments and agencies, such as DOD, DHS,
to the model that I talked about, where you have a level two,
that means deputy secretary level or principal under secretary
level, a person focused on management issues which are
inherently good government, and nonpartisan issues, with a
proven track record, statutory qualification requirements,
performance contract, term appointment, if you did that, I
think you should consider whether or not the CFO, the CIO, and
some of these other positions should be Senate confirmation.
But there may be another way to make sure that you are getting
qualified people.
For example, there could be a notification requirement and
a period of time before the appointment would take effect such
that if there was concern in the Senate or elsewhere with
regard to whether or not the person met the statutory
qualification requirements, those concerns could be expressed.
I think we need to look for ways that, for the good government
positions, they can be filled by qualified people at an
appropriate level in a timely manner with Congress having
appropriate input, but yet not having undue delays. Just a
thought.
Senator Akaka. Thank you. Thank you for giving me all the
time I need, Mr. Chairman. I thank our witnesses so much for
their responses. For me, it has been helpful. Thank you.
Senator Fitzgerald. You have been a terrific panel, and I
want to thank you very much for your time.
I just want to say on the CFO Act for the Department of
Homeland Security, I think the current administration, at the
OMB, you guys are doing a great job and I love your performance
management requirements. I have talked to Clay Johnson
extensively about OMB doing a great job. My concern, though, is
about future administrations that may not have the same
financial accountability concerns that this administration has
demonstrated. So I think that is something we need to consider,
whether we want to allow Homeland Security out there to just be
exempt from an act that other cabinet departments have to
follow.
But you are certainly right about the Senate confirmation
process. We are hearing the other branch of government's
feelings on that issue.
But thank you all. You have been terrific witnesses and we
thank you. We will try and keep up our oversight in this area.
Keep up the good work. Thank you all very much.
I would invite the second panel to please come up. Now I
would like to introduce the witnesses on the second panel.
Our first witness on this panel is Lawrence J. Lanzillotta.
Mr. Lanzillotta is the Acting Under Secretary of Defense
(Comptroller) at the DOD. We were just wondering what sort of
person would undertake that kind of a job. Mr. Lanzillotta is
responsible for the initiation of reforms within the Office of
the Department of Defense Comptroller.
Our second witness is Francis E. Reardon, Deputy Inspector
General for Auditing at the Department of Defense. Mr. Reardon
has served as Deputy Inspector General since 2003, after
serving since 1992 as Auditor General of the Army. In his
current position, he is responsible for all financial and
performance audits of the DOD, defense agencies, and joint
commands.
Third on this panel is Gregory D. Kutz, Director of
Financial Management and Assurance at the Government
Accountability Office. In his role as Director, Mr. Kutz is
responsible for financial management issues relating to the
Departments of Defense and State, as well as NASA and the
Agency for International Development.
Our fourth witness on this panel is Andrew B. Maner, the
Chief Financial Officer for the Department of Homeland
Security. Mr. Maner has served in this capacity since January
of this year, when he was appointed by President Bush. In his
role as CFO, Mr. Maner is responsible for department-wide
financial management, including all budget, finance and
accounting, and strategic planning and evaluation systems. You
spent the past 8 years in Illinois before you came out here, is
that correct?
Mr. Maner. Indeed.
Senator Fitzgerald. Well, welcome. Our next witness is the
Hon. Clark Kent Ervin, Inspector General for the Department of
Homeland Security. Mr. Ervin began his service at the
Department in January 2003 as Acting Inspector General and has
subsequently served as Inspector General since December 2003.
In this position, Mr. Ervin is responsible for independent and
objective audits, inspections, and investigations of the
Department's operations, including its efforts to consolidate
legacy components.
Our sixth and final witness is McCoy Williams, Director of
Financial Management and Assurance at the Government
Accountability Office. In this position, he is responsible for
the GAO's financial management work at eight CFO Act agencies,
as well as the Department of Homeland Security. He is also
responsible for GAO's work regarding governmentwide improper
payments, internal control standards, and single audit reviews.
Again, I would like to thank all of you for being here
today. In the interest of time, I would ask that you not read
your prepared statements. Those will all be submitted and made
part of the permanent record of this hearing. I would ask that
you limit your opening remarks to no more than 5 minutes. If
you can be briefer than that, we would welcome it because this
is a very large panel, with six witnesses.
With that, we will begin with Mr. Lanzillotta. You may
begin. Thank you.
TESTIMONY OF LAWRENCE J. LANZILLOTTA,\1\ ACTING UNDER SECRETARY
OF DEFENSE (CONPTROLLER)
Mr. Lanzillotta. Thank you, Mr. Chairman and Members of the
Committee. I want to thank you for this opportunity to discuss
the Department of Defense business management. This will be one
of my last hearings before leaving the Department and so I want
to give you my observations from three-plus years of working on
DOD management challenges.
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\1\ The prepared statement of Mr. Lanzillotta with attachments
appears in the Appendix on page 102.
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My message today is the Department has undertaken an
unprecedented comprehensive and visionary transformation to
achieve this aim. We are making progress to correct weaknesses
and control business system investment. Strong and consistent
Congressional support of this transformation is vital to
sustaining our progress.
To transform DOD's management, the Department must succeed
with three interdependent pillars of its strategy: Overhaul and
integration of DOD business processes and systems throughout
the Department's Business Management Modernization Program;
refine and advance financial management improvement plans of
the military services and defense agencies to enable them to
produce auditable financial statements, resulting in a clean,
auditable opinion; and audit items on the financial statements
as they become ready for audit by developing the capability to
do so. This transformation not only will be dramatically
improved, DOD's business and financial management, but it will
also enable DOD leaders to make resource decisions based on the
best management information available. And it will enable the
Department to meet the Chief Financial Officers Act and other
legal requirements, including satisfactory statements.
Briefly, over the last 3 years, we have been able to
establish a comprehensive inventory of business management
systems. We began to build a blueprint or architecture to guide
our transformation efforts. We designed an incremental strategy
to achieve our transformational goals. We developed a
governance process to provide strategic direction and oversee
our transformation of business processes and systems. We have
organized all major DOD business activities into six areas or
domains and designated an Under Secretary of Defense as a
domain owner to oversee each business area. We established a
portfolio management process, an industry standard for managing
IT systems. We established the DOD Audit Committee to provide
concerted senior leadership focus and produce an auditable
financial statement resulting in clean opinions. We developed
individual reporting entity improvement plans that show planned
improvements and milestones. And we implemented additional
discipline to our quarterly reporting process, accelerating our
preparation of financial reports and elevated our commitment to
quality.
It is important to note that domain owners are responsible
for overseeing the transformation of business activities
managed by the military services and other DOD components. This
governance plan has already demonstrated that it can work. We
are continuing to strengthen and expand it. Some observers do
not believe we are moving fast enough, yet acknowledging that
DOD is one of the world's largest and most complex
organization, with a huge business transformational challenge.
The Department of Defense is in the business transformation
for the long term. It will take years to fix our systematic
problems, which evolved over several decades.
The last observation I would like to make, we set out on a
course of transformation, outlining this course with domains
and our governance process to control our IT investment and the
direction for the Department. I would ask that the Congress not
change our direction. Both bills of the National Defense
Authorization bill significantly cut the funding for this
effort and dramatically change the direction of this effort.
Changing course right now would delay an untold number of years
in our effort to correct this problem.
In closing, I urge you and other Congressional leaders to
continue to support the Department of Defense in its efforts to
transform DOD's business management. Congress and the
Department must continue to partner in this unprecedented
undertaking. Our business transformation progress is consistent
with U.S. industry standards and it is all the more remarkable
that our accomplishments have occurred while we are fighting
the global war on terrorism, advancing bold initiatives to
transform America's military capability.
This is a critical time for us to ensure that DOD's
management and business systems become just as superlative as
the military forces they support. We, in the Department of
Defense, appreciate and continue to need the Congressional
support to achieve this vital priority. Thank you, Mr.
Chairman.
Senator Fitzgerald. Thank you. Mr. Reardon.
TESTIMONY OF FRANCIS E. REARDON,\1\ DEPUTY INSPECTOR GENERAL
FOR AUDITING, U.S. DEPARTMENT OF DEFENSE
Mr. Reardon. Mr. Chairman and Members of the Committee, the
Department of Defense Inspector General, Hon. Joseph Schmitz,
regrets that he is unable to attend this hearing.
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\1\ The prepared statement of Mr. Reardon appears in the Appendix
on page 176.
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In addition, I would like to thank you for the opportunity
to discuss first the status and progress in achieving an
unqualified audit opinion for the Department of Defense, and
second, other areas of financial management within the
Department.
The Department's financial statements are the most
extensive, complex, and diverse in the government. The
Department faces financial management problems that are
longstanding, pervasive, and deeply rooted. These problems have
impeded the Department's ability to provide reliable, timely,
and useful financial and managerial data to support operating,
budgeting, and policy decisions.
To address these issues, the Department has undertaken the
ambitious task of overhauling its financial management systems
and business processes, and we are encouraged by the many
current initiatives led by the Office of the Under Secretary of
Defense/Comptroller and senior financial managers within the
DOD components to correct longstanding problems. Given these
initiatives, we believe there is a chance of the Department of
Defense reaching the goal of a favorable audit opinion for
fiscal year 2007. However, what is most encouraging is the
effort being expended to correct the Department's problems.
In order to adequately support the Department's goals of a
clean fiscal year 2007 audit opinion, we in the Office of the
Inspector General are putting in place plans and actions to
increase our financial auditing capability during the next 3
years. Our efforts are directly related to the Department of
Defense plan to assert that its financial data is reliable and
ready for audit between now and 2007. During this time period,
there could be more than 100 assertions on financial
statements, systems, or line items. As those assertions occur,
we must be ready to audit as required by the CFO Act.
We also strongly support Section 1008 of the fiscal year
2002 National Defense Authorization Act, which directs us to
perform only minimal audit procedures required by auditing
standards until management asserts that the financial
statements are reliable.
We are, therefore, working with the Department to ensure
that we do not expend taxpayer dollars for extensive audit work
until we believe that favorable opinions are probable. However,
if the funding for our planned build-up and contracting efforts
is delayed until the Department asserts that all DOD-wide
financial statements are reliable and ready for audit, it will
be impossible to complete the necessary audit work in a timely
manner, thus further delaying a favorable audit opinion on the
U.S. Government Annual Financial Report.
The Department has readily acknowledged that many of its
financial management and feeder systems do not produce adequate
data to support various material amounts on the financial
statements. The Department of Defense established the Business
Management Modernization Plan to transform and modernize the
Department's business and financial processes and systems to
optimize efficiency and effectiveness. We are monitoring
progress in achieving the plan's goals and have made
recommendations for improvements in the business enterprise
architecture as part of the overall modernization plan.
However, our efforts on the Business Management Modernization
Plan have been primarily limited to coordination with the
Government Accountability Office, which is doing extensive work
in this area, as evidenced by their recent reports being
discussed during this hearing.
The weaknesses that affect the auditability of the
financial statement also impact other DOD programs and
operations and contribute to waste, mismanagement, and
inefficient use of DOD resources. For example, we testified
before the Senate Committee on Governmental Affairs on April
28, 2004, and reported that purchase cards accounted for 25
percent of the purchase actions made in the Department in
fiscal year 2003. We presented the results of three recent OIG-
DOD audit reports that identified management control problems
with the use of purchase cards.
Subsequent to that hearing, our office issued an additional
report on purchase cards which discussed further internal
control weaknesses. We are working with both the Purchase and
Travel Card Program Management Offices to improve these
programs by reducing financial risk to the government and
offering recommendations to improve the Federal Managers
Financial Integrity Act Controls.
Thank you for considering the views of the Office of the
Inspector General. We have provided additional details on our
efforts in the written testimony provided to you for this
hearing and I would be happy to address further questions as we
go along. This concludes my testimony.
Senator Fitzgerald. Thank you, Mr. Reardon. Mr. Kutz.
TESTIMONY OF GREGORY D. KUTZ,\1\ DIRECTOR, FINANCIAL MANAGEMENT
AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Kutz. Mr. Chairman, thank you for the opportunity to
discuss financial management at the Department of Defense.
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\1\ The prepared statement of Mr. Kutz appears in the Appendix on
page 195.
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The following two examples show the importance of
successful financial management and business reform at DOD.
First, 94 percent of mobilized Army National Guard soldiers
that we investigated had pay problems. These problems
distracted these special forces and military police from their
missions, imposed financial hardships on their families, and
has had a negative impact on retention. Our soldiers deserve
better.
Second, DOD was unable to effectively recall 250,000
defective chemical and biological protective suits from its
inventory. As a result, many Congressional Members were
concerned that our forces in Iraq were issued these defective
suits. Thousands of these defective suits were sold to the
public on the Internet, including 379 that we purchased in an
undercover operation, and you showed one of those 379 in your
opening statement. It is the exhibit to my left. And thousands
of these suits were improperly issued, as you mentioned, to
local law enforcement officials.
DOD's stovepiped, duplicative systems contribute to these
and many other problems and will cost taxpayers $19 billion in
2004. That is $52 million a day. Attempts to modernize DOD's
business systems routinely cost more than planned, miss their
schedules by years, and deliver only marginal improvements or
are terminated with no benefits at all.
DOD's superior warfighting capabilities were clearly
demonstrated in Iraq and Afghanistan. However, that excellence
is often achieved despite the enormous problems with DOD's
business systems and processes.
DOD's senior leadership is committed to transform the
Department's business operations and financial management. With
waste and inefficiency costing $20 billion or more a year, the
success of their efforts is critical.
Mr. Chairman, this ends my statement. I would be happy to
answer your questions.
Senator Fitzgerald. Thank you very much, Mr. Kutz. Mr.
Maner.
TESTIMONY OF ANDREW B. MANER,\2\ CHIEF FINANCIAL OFFICER, U.S.
DEPARTMENT OF HOMELAND SECURITY
Mr. Maner. Thank you, Mr. Chairman, for the opportunity to
be here and discuss progress that DHS has made in the area of
financial management and thank you for your personal support
that you have provided DHS since our creation.
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\2\ The prepared statement of Mr. Maner appears in the Appendix on
page 223.
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All of us at the Department are proud of the progress we
have made since the Department's inception in March 2003 while
dealing with the enormous challenges involved in starting up
the third largest department in the Federal Government. With
Secretary Ridge's support, we have made tremendous headway in
unifying and strengthening the Department's financial
management, accounting, budgeting, strategic planning, and
performance measurement process and systems. We have vastly
streamlined the number of financial management service
providers. We have consolidated bank card programs.
Two months after our creation, we subjected ourselves to
the rigors of a consolidated financial statement audit and
obtained a qualified opinion on our September 30 balance sheet.
We submitted our first strategic plan and continue to perfect
our investment review process. We completed and will soon
submit our first future years' Homeland Security program, known
as the FYHSP. We have made great strides in building an
integrated financial system for the Department and have begun
developing department-wide standard operating procedures for
financial management.
With these accomplishments under our belt, we continue to
forge ahead towards our goal of making DHS the model of 21st
Century financial management excellence.
Progress in our endeavor to further define and consolidate
these functions within the Department is made every day. We
continue to look at the most efficient and effective way to
deliver financial management services to the Department long-
term. We continue to utilize best practice capabilities within
the Department and work diligently on the weaknesses that
exist.
Essential to consolidated management functions is an
integrated department-wide resource management system. E-
Merge\2\ is the Department's initiative that will consolidate
and integrate our budget, accounting, cost management,
acquisition, grants, and asset management functions. As e-
Merge\2\ is implemented over the next few years, not only will
it enable consolidation of these functions, but it will greatly
enhance our visibility, oversight, and accountability of
component operations and financial management.
Financial management excellence also requires
accountability, oversight, and significant attention to
developing a strong internal control environment, which I
remain committed to. For example, in order to correct the
material weaknesses identified in our 2003 audit, corrective
action plans have been developed by each organization and I
hold monthly meetings with these organizations to ensure
progress is being made on these weaknesses. We are also
addressing other important issues, such as elimination of
improper payments and ensuring that the funds made available to
State and local governments and other non-Federal recipients
are awarded in a timely and proper manner.
In closing, I would like to thank the Subcommittee again
for the opportunity to be here. DHS has accomplished much under
challenging circumstances and I am confident we will realize
even greater progress in the coming years. Thank you, Mr.
Chairman.
Senator Fitzgerald. Thank you, Mr. Maner. Mr. Ervin.
TESTIMONY OF CLARK KENT ERVIN,\1\ INSPECTOR GENERAL, U.S.
DEPARTMENT OF HOMELAND SECURITY
Mr. Ervin. Thank you, Mr. Chairman. As you noted, I have
submitted a longer statement for the record, and in the
interest of time, I will truncate my oral remarks, as well.
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\1\ The prepared statement of Mr. Ervin appears in the Appendix on
page 229.
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The Office of Inspector General engaged KPMG to complete an
audit of DHS's financial statements as of September 30, 2003,
and for the 7 months then ended as required by the
Accountability of Tax Dollars of 2002. KPMG gave a qualified
opinion on the consolidated balance sheet and the statement of
custodial activity, meaning that except for three areas, these
statements were presented fairly and free of material
misstatements.
The three areas were, one, a lack of documentation related
to the Coast Guard's property, plant, and equipment, valued at
$2.9 billion; two, KPMG's inability to observe a sufficient
number of the physical counts of operating materials and
supplies at the Coast Guard, or otherwise to verify $497
million of such assets; and three, the lack of sufficient
actuarial documentation provided prior to the completion of
KPMG's audit procedures to support retirement benefits recorded
at $3.3 billion at the Secret Service and post-employment
benefits reported at $201 million at the Coast Guard.
This was not unexpected in a first-year audit. The Coast
Guard's financial statements had never been audited at the
level of detail required at DHS, where the Coast Guard became a
larger bureau relative to its parent Department. Since the
audit, the Secret Service has obtained an actuarial report on
its retirement benefits liability and believes it has recorded
the correct amount. And likewise, the Coast Guard has done the
same with regard to the post-employment benefits liability
issue.
KPMG was unable to provide an opinion on the other
statements, which we collectively call the cost activity
statements, and I will be happy to explain the reasons if there
are questions about that.
Let me turn now to just a word about the audit challenges
for 2004. As you know, the reporting deadline has been
accelerated to November 15, 2\1/2\ months earlier than last
year's deadline. Meeting that date will be a considerable
challenge for DHS.
As well, one of the greatest challenges that the Department
has faced this year is the realignment of back office functions
at the ICE Bureau, Immigration and Customs Enforce, Customs and
Border Protection Bureau, and the Citizenship and Immigration
Services Bureau that took place at the start of fiscal year
2004. Nine months into the fiscal year, many agreements
regarding intra-bureau services that are being provided between
and among the bureaus are not in place, leaving many accounting
issues open. The CFO has recently reported progress in this
area, and we are pleased to hear that, but time is short to
clear up any accounting issues that remain this year.
Because the performance and accountability report was
issued in February, DHS has had little time to take corrective
action on the material weaknesses and reportable conditions,
about which I can speak in greater detail later, reported last
year before they entered into this year's audit cycle. To the
extent that these weaknesses remain, they, too, will continue
to make the preparation of the financial statements and the
auditing of them more difficult.
That concludes my short statement, and again, I will be
happy to answer questions. Thank you very much.
Senator Fitzgerald. Thank you, Mr. Ervin. Mr. Williams.
TESTIMONY OF McCOY WILLIAMS,\1\ DIRECTOR, FINANCIAL MANAGEMENT
AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Williams. Thank you, Mr. Chairman. I am pleased to be
here today to discuss financial management challenges facing
the Department of Homeland Security.
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\1\ The prepared statement of Mr. Williams appears in the Appendix
on page 245.
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First, DHS faces the challenge of obtaining an unqualified
financial statement audit opinion and fixing the previously
identified internal control weaknesses it inherited from its
component agencies. As of September 30, 2003, DHS had 14
reportable conditions, seven of which are material weaknesses.
Like other Federal agencies, DHS has a stewardship
obligation to prevent fraud, waste, and abuse, to use
taxpayers' dollars appropriately, and to ensure financial
accountability. DHS management must establish effective
internal controls to safeguard assets, protect revenue, and
make authorized payments. Improper payments, which are a
governmentwide problem, occur for many reasons, but the root
cause can typically be traced to a breakdown in internal
control.
While DHS was not required to report improper payments for
2003, several of its inherited control weaknesses suggest risk
of improper payments and loss of revenue. As it addresses
inherited control weaknesses and integrates its business
management functions, DHS should pay close attention to
implementing strong internal controls.
Mr. Chairman, another significant challenge for DHS is
developing a financial management architecture with integrated
systems and business processes. According to DHS officials, the
Department is in the early stages of acquiring a financial
enterprise solution to consolidate and integrate its financial
accounting and reporting systems. Similar projects have proven
challenging and costly for other Federal agencies. For example,
efforts at NASA failed to meet the needs of users and key
stakeholders. To avoid similar problems, DHS must ensure
commitment and extensive involvement from top management and
users in the financial system development and integration.
Mr. Chairman, DHS is the only cabinet-level department in
the Federal Government today that is not subject to the CFO
Act. With a fiscal year 2004 budget of nearly $40 billion and
more than 180,000 employees, the Department does not have a
presidentially-appointed CFO subject to Senate confirmation and
is not required to comply with FFMIA. DHS should not be the
only cabinet-level department not covered by what is the
cornerstone for pursuing and achieving the requisite financial
management systems and capabilities in the Federal Government.
We believe enactment of S. 1567 will increase the likelihood
that financial management challenges at DHS will be overcome.
In closing, Mr. Chairman, I want to emphasize that the
American people have increasingly demanded accountability from
government and the private sector. We know that many of the
larger agencies transferred to DHS have a history of poor
financial management systems and significant internal control
weaknesses, providing further evidence that DHS should be
subject to the CFO Act and thus FFMIA.
Mr. Chairman, this concludes my statement. I would be happy
to answer any questions that you may have.
Senator Fitzgerald. Thank you. I want to hone in on this
issue about DHS not being subject to the CFO Act. We do have a
CFO, Mr. Maner, who is here today, but he is not presidentially
appointed. He is not confirmed by the Senate. As a practical
matter, other than Mr. Maner is not confirmed by the Senate and
appointed by the President technically, what are the other
things specifically--you mentioned that the Department is not
subject to the FFMIA. What requirements do we impose on other
departments that aren't being imposed on the Department of
Homeland Security? Maybe Mr. Williams would like to go into
that.
Mr. Williams. Well, within the requirements of FFMIA, that
would be a report that would talk about the various systems,
whether they are in compliance with JFMIP requirements. I think
the bottom line is that you hit on a key point on the first
panel, and that is that while this administration has
demonstrated strong support for the intent of the legislation,
the issue--when this particular act was passed, I was involved
in working with this Subcommittee's counterpart on the House
side, and the concern then and the concern that you raised this
morning that still exists is that you want to make sure that
you have a structure in place that will make sure that whether
it is this administration or the next administration or ten
administrations from now, that you have individuals in this
position that are qualified to carry out the various financial
management functions, that you have policies or laws in place
that will make sure that agencies are striving to have systems
that can produce information in a timely manner, because it is
not just a matter of producing the information once a year in
which you get a clean opinion and then the next day you have
got to start back over again. You want to have that information
throughout the year.
So I think these requirements for having good systems in
place, making sure that the individual in the position is
qualified and that the structure is in place, not just for one
administration but for any administration that is in office.
Senator Fitzgerald. Mr. Maner, I don't know that it is your
role to comment on whether your Department should be subject to
the CFO Act. Do you have any thoughts you want to offer?
Mr. Maner. Well, just two quick thoughts, just for the
record, just to make sure that it is stated correctly. I am
presidentially appointed and not Senate confirmed, just so we
are all on the same page there.
Senator Fitzgerald. OK.
Mr. Maner. Again, my thoughts are that the Homeland
Security Act set up DHS less than 2 years ago. My broad thought
is that the structure that was put in place in the Homeland
Security Act should be given a chance to work.
In terms of the CFO Act and FFMIA, certainly those, and for
everyone in the government, those are beacons of how to manage.
And so we certainly use those to manage. One example of that is
as we----
Senator Fitzgerald. Even though they don't apply to you?
Mr. Maner. That is right. One example of that is as we went
out for our----
Senator Fitzgerald. But wouldn't you agree that we have no
assurance that some successor of yours in a future
administration would voluntarily decide to comply with those
acts?
Mr. Maner. Yes. It would be hard to dispute that.
Senator Fitzgerald. OK.
Mr. Maner. But one point I would want to make is in the
spirit of FFMIA, for example, when we go out, or when we went
out with our e-Merge\2\ solicitation, in that RFP was the
requirement that the provider be compliant with those
standards. So we have tried to integrate it as best we can. And
also, other parts of the CFO Act, slightly less known, such as
being a member of the OMB CFO Council, those things we are
doing today, so I would leave it at that.
Senator Fitzgerald. OK. Now, I mentioned in my opening
remarks that several news reports, particularly in the
Washington Post, have criticized homeland security spending by
State and local governments, citing the use of Federal homeland
security funds to plug perceived budget holes or to fund
purchases that do not appear critical to homeland security
needs. I think there was one news report that cited spending on
janitorial services by some local unit of government.
While such reports may be due in part to the lack of
Federal guidelines or restrictions on the use of Federal funds,
they raise concerns regarding the Department's efforts to
ensure that taxpayer dollars are being spent wisely. Mr. Maner,
how are you working with State and local officials to ensure
the proper use of Homeland Security funds?
Mr. Maner. I will talk for a second a bit about structure
and then a bit about systems, because I think they are both
important. One of the items that the Department has done is to
consolidate this year. Secretary Ridge has consolidated all the
grants management functions, or the policy for grants
management, in one office in Homeland Security. That is taking
effect this next fiscal year. So part of it is to get all of
the grants in one location, which I think will prove to be
effective.
The second is to create a systems environment that allows
for information visibility, allows for perfect visibility into
the grants management process and such. And one of the things
that I have found very important and am very committed to is
including grants management in our e-Merge\2\ project so that
we are, as part of our financial system rollout, including
grants management, because at the end of the day, I do believe
very strongly that having visibility, a wide swath of
visibility to all the money that is put out to State and
locals----
Senator Fitzgerald. Do you know how much money we are
talking about that is issued in grants? Would you know roughly?
Mr. Maner. I know that in, really in the last three grant
cycles, we have put out about $8 billion, but if you don't
mind, I will get back to you with specifics for the record.
INFORMATION PROVIDED FOR THE RECORD
In FY 2003, the Department awarded $8.0 billion in non-
disaster grants and $5.9 billion in disaster grants.
Senator Fitzgerald. OK. Mr. Ervin.
Mr. Ervin. Yes. If I could just add something on that, Mr.
Chairman, a couple of things. First of all, the Washington Post
article that you are referring to, we ourselves were asked
about that by Congressman Sensenbrenner and it turns out that
particular article was based on a Justice Department grant as
opposed to a Department of Homeland Security one.
Having said that, certainly this kind of thing could be
happening in the Department of Homeland Security, and that
being so, we are going to start auditing the expenditure of
these first responder funds. We will be doing that later this
year. As you may know, we have issued a report already about
the flow of funds from the Department to State and local
governments and first responders, and actually that was a good
news story for the Department. But we haven't, as I said, begun
to look at exactly how those funds were being spent at the
State and local and first responder level. We will do that.
If I could talk more generally just for a second about
grants. As Mr. Maner says, the Department is to be applauded
for moving toward consolidating the grant process in the
Department, and also e-Merge\2\ will include, we are told, a
grants component, and that is to be applauded, as well.
There are certain structural issues, as well, that are
important here, and that is true for the Office of CFO and for
the Office of the Chief Information Officer, as well, and that
is with regard to the Chief Procurement Officer. Right now,
there are only seven procurement shops that came into the
Department of Homeland Security to date. Fifteen other
components of the Department are still being serviced by
entities outside the Department, and you can see the problem
there in terms of consistency and control.
Further, with regard to the seven procurement shops that
are in the Department of Homeland Security, the Chief
Procurement Officer does not have operational control over
those shops and cannot impose consistency among those shops. So
there are certain structural issues that must be attended to.
Senator Fitzgerald. Does the Government Purchasing Act--the
traditional government procurement laws apply to all those
procurements?
Mr. Ervin. I believe, so, yes. That is right.
Senator Fitzgerald. OK. Once a grant leaves Homeland
Security and goes to a unit of local government, does your
office have the ability to go audit that unit of local
government to see how it is spending the money? I hope all
local governments are concerned that somebody may come in and
audit how they use this money.
Mr. Ervin. Yes, sir, the answer is yes, and we do that. For
example, since the Department has been operational, March 1,
2003, we audited 121 FEMA disaster grants to State and local
communities and questioned $68 million in costs. One of the
things that we found during the course of those audits were
recurring problems, and this is another issue. More attention
on the Department's part to working with State and local
governments to make sure that these recurring problems don't
occur is called for.
For example, with regard to the $68 million, we frequently
found that the State and local governments did not, as they are
required to do, seek FEMA's written permission to either
continue the project past the expiration of the time allotted
for it or to continue to run up costs after the ceiling had
been reached. And then at the conclusion, FEMA would give a
retroactive waiver or permission for that having been done.
Obviously, that conduces to waste, fraud, and abuse. So there
needs to be attention paid on FEMA's part and the part of other
components to making sure that the terms of these grants are
complied with, and when they are not, there need to be
consequences to the State and local awardees or sub-grantees.
Senator Fitzgerald. Mr. Lanzillotta, you mentioned that
bills moving through Congress may cut funding for the effort
that includes the accountability or the accounting at the DOD.
Could you elaborate on that? What bills are you referring to?
Mr. Lanzillotta. I am referring to, Mr. Chairman, the House
and Senate version of the authorization bill that is in
conference right now. Each bill took reductions to each part of
our strategy, to the IG, to our audit ability.
Senator Fitzgerald. How about the actual DOD appropriations
bill that passed the Senate?
Mr. Lanzillotta. Both of those bills also took reductions.
Senator Fitzgerald. How big were the reductions?
Mr. Lanzillotta. Ranging from $45 million to $150 million.
Senator Fitzgerald. Out of how much total is spent----
Mr. Lanzillotta. Against these three programs where they
took the reduction, of about $500 million.
Senator Fitzgerald. So that is an enormous percentage if
you are looking at the $140 million reduction.
Mr. Lanzillotta. Correct.
Senator Fitzgerald. OK. That is something I am glad you--if
your office could work with my staff on that, it might not be
too late to write a letter to Senator Warner or somebody on
that conference committee to talk about the importance of
continuing the efforts to improve the financial accounting in
DOD.
Mr. Lanzillotta. We would be happy to, Mr. Chairman.
Senator Fitzgerald. I hope the Armed Services Committee is
aware of the importance of this issue and it is not just the
Governmental Affairs Committee.
Mr. Lanzillotta. They are my next stop right after this
hearing.
Senator Fitzgerald. OK. I am glad you are making your views
known.
Mr. Reardon, you believe that by fiscal year 2007, there is
a chance that DOD could be in a position to merit a qualified
opinion, but only a chance, I guess you said. I know Mr.
Lanzillotta mentioned that he is leaving, is that correct? You
are leaving the DOD?
Mr. Lanzillotta. Yes, Mr. Chairman. This will be,
hopefully, my last hearing. [Laughter.]
Senator Fitzgerald. This will be your last hearing? Oh,
gosh. [Laughter.]
And it has probably been a very difficult and frustrating
job. I kind of wondered out loud why anybody would want to take
up this task. It is like Hercules trying to clean up the Agean
stables. That is what it sounds like to me. It is kind of a
thankless task.
We are now missing a--we don't have a Comptroller position
filled. That is pending for appointment right now. How much do
you think, Mr. Reardon, we are being held back by turnover in
personnel and just the lack of appeal that positions such as
Mr. Lanzillotta has in trying to clean up this mess at DOD? How
big of a factor is that?
Mr. Reardon. Obviously, it is a factor and leadership does
chart the way. I don't know how to put a percentage on it, but
with turnover, there is the factor of lost leadership and
direction.
But what I have seen in the Department in the year that I
have been there is that there are a number of career civil
servants that are working these issues, working the committees,
working the various sort of audit committees that we attend, as
well as the Comptroller's shop. People like Joanne Boutelle and
Terry McKay are trying to work with each of the components of
each of the services to get improvements done.
And when I said ``chance,'' I mean, it is a limited chance
to get a qualified opinion. But every year we see coming up,
based on the progress that has been made, improvements.
Ms. Springer talked about focusing on certain segments. We
see for fiscal year 2005 that the fund balance at Treasury may,
in fact, be able to have us do audit work on it and attest to
whether it is reliable or not. The Air Force is working on its
statement of budgetary resources, again, with the idea that in
2005, that they will assert that they are ready. The Corps of
Engineers is doing the same sort of thing.
So I think there is some delay, some halting, going back
and forth, but what I do see underneath it is a number of
people working to try in the different departments to at least
show improvement, and we are seeing improvement with the
systems, some of the legacy systems, and we are seeing
improvement in the processes and stuff. I think that is
important, and having an overall leader there for a sustained
period of time is good. Dr. Zakheim was there just 3 years and
made some good progress. I just think it helps.
Senator Fitzgerald. Mr. Lanzillotta.
Mr. Lanzillotta. Mr. Chairman, if you don't mind, could I
make an observation from my 3 years of working on this?
Senator Fitzgerald. Yes.
Mr. Lanzillotta. For the Department to continue to make
progress, I would like to emphasize Mr. Reardon's comment, it
is a culture that has to be created for change. And once this
culture is created, the political leadership that comes and
goes is important, and I don't want to belittle that. But if
the change in the culture is there, then progress will be
continually made and it won't be based on one individual,
because if we base any of this on one individual, whether it
was Dr. Zakheim, myself, or the future Comptroller, this
initiative will fail.
I think that some of the examples that Mr. Reardon talked
about from the career side is a change in culture as to where
we are making progress on how this should go. I would like to
make a plea that part of this culture change is Congressional.
We need the Congressional support, and since I am leaving, we
need the Congressional pressure to continue this program. We
need chairmen like yourself to call us up here and make us
accountable for how this works, because that is part of the
change in the culture. We have that.
When I first started this 3 years ago, 3-plus year ago, I
would try to come over here, because I did work on the Senate
staff side, and try to brief as to what we were doing, and that
worked for a while because some of my friends would take
briefings. Now, nobody takes briefings. I need to go to the
Defense committees. I know the Government Reform Committee. I
need to be able to get Congressional support because that all
adds to it.
And it is the culture, because once the Department changes
its culture, which I believe they have, but if we can maintain
that, you see the things that the Department has done in Iraq
and Desert Storm and Afghanistan. I mean, we can make
remarkable progress. Two-thousand-seven is achievable,
aggressive, heroic to get there. It is achievable as long as we
can maintain the momentum.
Senator Fitzgerald. When you say the culture needs to
change there, are you talking about the rank-and-file civilian
employees? Career employees who, when a political appointee who
may be in charge of their work comes in, they look at this
person and say, well, we have always done things this way, and
we are used to doing it this way. They are resistant to the
change, and they look at their politically-appointed superiors
as only here temporarily and we are just going to continue
doing things the way we have always been doing them, or----
Mr. Lanzillotta. It has to start--they know--I don't say
that they do this--that a political appointee stays about 18
months, maybe 2 years, and they know that the political
leadership changes. They know that as the leadership changes,
sometimes they change direction. They know that you could wait
out political leadership. But what is more important, not that
they will because I think some of the examples that Mr. Reardon
talked about, these are all advances that were made by the
career force.
And what has got to change and what has changed is when we
have 4,000 business systems of some type, which is a remarkable
number, we have 42 or 43--I forget the number now exactly--
travel systems that do exactly the same thing. That started
with the culture that everybody stovepiped. Everybody was
worried about their problem. Everybody said, this is how I am
going to fix my problem, by getting this system to do this for
me. Nobody worried as to how that fit into the overall
financial systems, the inventory systems, the asset visibility
systems. Nobody worried about the end-to-end process.
What we have done in the Department is at the lowest levels
at every staff agency, we have decided to build the
architecture, and the architecture to outline and map out what
our activities and processes are. Now, there were two values to
that. The first value is we needed to find out how many systems
we had and we needed to put down on a piece of paper on how we
do business, and we needed everybody to see it. So when we say
we need to design an end-to-end system, it wasn't up to Larry
Lanzillotta to decide what that end-to-end system was. It was
in the architecture that it went from this point to this point
as to what that end-to-end system was.
The reason why some of our systems have failed in the past
is the same reason why they fail in private industry. They
haven't mapped it out, they haven't done the planning, and they
don't know what it affects. They don't know where the
interfaces are, so when they put their new system on, it
doesn't work, or a system that was depending on it all of a
sudden doesn't work.
We are changing that culture now. We have outlined our
business systems. We have divided up our business areas. We put
our business systems underneath these business areas. We have
made people responsible for looking at investment in these
business systems, approving investment in these business
systems, and more importantly, when we field the new system,
instead of just fielding a new system as to what systems get
turned off to make it work.
So back to the example of the defense travel, the defense
travel system has had a checkered past. The one thing that
defense travel did, it reengineered the business process. It
checked with all the interfaces to the financial systems and it
goes from the traveler all the way through his trip, through
the financial statements, all the way up and back down to pay
him his check. It is untouched by human hands.
The examples you had, or the IG or Mr. Kutz talked about
the JSLIST suits, it all goes back to the same problem. It is
asset visibility, and the asset visibility, you don't get until
you do an end-to-end process which shows the interfaces between
these systems, and that is the course we are on.
Now, it is kind of like, in my fleeting moments here in the
Department, I am just imploring the Congress to stay the
course. I just feel in my heart of hearts that we are at the
point where we are going to make great progress, and it has
been slow. It has been slow and it has been tedious. When we
went out and mapped out for the architecture, there are 180,000
statutory or regulatory requirements that had to be considered,
180,000. In the finance and accounting systems alone, I had
5,000 statutory or regulatory rules that had to be verified and
checked or challenged. At the end of the day, we are going to
come back to the Congress with a package of, ``these rules
don't make sense.''
Senator Fitzgerald. You are still working on that, aren't
you? I think I have asked the Secretary to give us a list. I
know he cited some 750 reports, or maybe it was less than that,
for example, that DOD had to submit every year to Congress.
Many of these were obsolete reports, and you just have people
complying with these ancient laws of Congress forever and ever
producing reports that nobody is even reading. That was just
one example that the Secretary gave us.
Mr. Lanzillotta. We can provide you, Mr. Chairman, a
binder. Last time we took this effort, we put in a six-inch
binder a one-page description of every report that the
Department was required to do. I need to update that because
that binder is about 2 years old, and every year we add about
500, 600 reports to it.\1\
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\1\ The list of active CMRs submitted for the record appears in the
Appendix on page 105.
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Senator Fitzgerald. OK. Well, please give that list to us
and we will see what we can do before I leave Congress. I
didn't tell you, I am retiring in January, too. But there will
be others like Senator Akaka here to keep supporting the DOD in
changing their accounting system.
Mr. Kutz, I want to get to you. You talked about the suits
and you mentioned, I think, a figure of $19 billion a year lost
through waste, mismanagement, and you said that came out to $55
million a day.
Mr. Kutz. The $19 billion is the amount they spent on
business systems annually, including modernization and legacy
systems.
Senator Fitzgerald. On business systems alone?
Mr. Kutz. That would be on logistics, on finance systems,
acquisition systems. It would be the business side, excluding
intelligence-related and weapons systems. The total Department
budget may be $30 billion or a little bit more. That would be
maintaining and operating the current, what Mr. Lanzillotta
testified yesterday and just mentioned, the current inventory
of about 4,000-plus business systems. So that is the cost of
having the stovepiped, non-integrated systems that don't work.
Senator Fitzgerald. Unbelievable.
Mr. Kutz. So it is an enormous amount of money, and that is
one of the places where when I mentioned the $20 billion or
more that could be saved through improvements in accounting----
Senator Fitzgerald. Are they all custom-made business
systems, too?
Mr. Kutz. Some are, some aren't. I mean, they have evolved
over time. There was no plan that Mr. Lanzillotta is talking
about now that they are trying to develop so there is an
architecture. They were developed in stovepipes because each
service had their own money. They decided they wanted to do
their own type of system. And now you have hundreds of
logistics systems, dozens of travel systems, hundreds of
personnel systems, etc.
I want to go back to the culture issue, because----
Senator Fitzgerald. Who is responsible for cleaning that
up, for example, the business system? Mr. Lanzillotta, is there
somebody in the DOD who is responsible for getting common
business systems, where we are not spending $19 billion a year,
$55 million a day, just on maintaining the existing business
systems?
Mr. Lanzillotta. Mr. Chairman, to go back to one of your
earlier comments about the CFO Act, yes. I am. And we have done
several things to do away with that. I disagree with Greg as to
what that number is, but it doesn't do away with the point that
Greg is trying to make, that we have a lot of money in these
stovepiped systems.
The two examples that you have here that you mentioned
earlier in your statement about the two failed systems, we had
to play the cards of where we were at. When we came in 3 years
ago and said, this is what we are going to do. We are going to
develop a common architecture. We were going to see where
everything fit. We were going to know our interfaces and what
we needed to do the end-to-end process.
We stopped or slowed investment into legacy, what we call
legacy systems, and the systems that you mentioned, the reason
we killed them is that they weren't ever going to meet our
needs. They were COD systems, in some cases, that we had so
many bolt-ons that they didn't work right and they were never
going to be financially compliant or give us the type of
information or do the end-to-end process that we wanted to
have.
Business systems in the private sector fail because the
ERPs fail. In fact, a majority of ERPs fail in the private
sector and they fail because they haven't done the proper
planning. What we have done with these systems, we had another
example--I will give you two examples. These are two failed
systems. They didn't work. We didn't have our requirements
right. When we came in and we started building our
architecture, we looked at these systems and we said they were
never going to fit in and it was better to terminate these
systems now than try to go through the life-cycle cost of these
systems and go 10 years from now and say they don't work.
I have a problem with my pay systems. My pay systems,
military pay systems are written in a language called COBALT,
and when I was in college, that is a language that I studied. I
can't find a COBALT programmer right now. They are very hard to
find. I haven't been able to make a change to this program
since 1997. I maintain 500 people to hand-jam pay changes into
my military pay systems since 1997. That is all they do.
We went to PeopleSoft--that is part of Deimer's--and I
said, I have a problem. I can't continue to do this. My
military pay systems are going to fail. If I don't do something
now, I run the risk of not being able to make a payroll, and
that would be disastrous. Can you help me? And I got, umm, get
out of the way. Let me get the next vendor in here. They said,
I think we can help you if you work with us.
I wouldn't let the people change one business practice that
wasn't already in that system, and in 6 months, it ran the Army
payroll in 2 hours. When I compared it to my current payroll
system that takes me a week to run the military payroll--I
believe it is a week, I will have to correct that for the
record if it is wrong--the PeopleSoft system for compatible pay
was more accurate in every case.
So I was able to buy it. We already had the license. I
didn't have to buy it. I was able to use an existing license
for COD software, change our business practices to match the
leading industry business practices in the software. I had to
work with PeopleSoft to get the tax package in it, because it
wasn't ready to go. And in 6 months, I was able to do a proof
of concept and run the military payroll in 2 hours more
correctly than I can do it right now.
I will pay for this system after I fully field it in 18
months. But that is the type of progress we can make if we stay
the course.
Senator Fitzgerald. So you are making progress in discrete
areas like that. What about like on inventory control, which
was the problem that gave rise to the defective suits not being
recallable?
Mr. Kutz. We issued a report yesterday on a system that
Defense Logistics Agency developed, and again, it was a
stovepiped solution. It was represented at hearings over the
last several years before the National Security Subcommittee on
the House side that this BSM systems project would fix the
JSLIST suit problem. So if we had defective suits again, we
would be able to recall them, or if there was an emergency and
suits needed to be identified to be shipped to a certain part
of the world, that they would be able to be done.
That system is being implemented. It is going to cost
probably $1 billion or more and it doesn't fix that problem. It
is a stovepiped solution. It will fix issues within DLA, but it
does not provide the end-to-end visibility of the JSLIST suits
from the time that they are shipped from a DLA warehouse to the
Army, Navy, or whoever else gets them so that, again, if you
wanted to find them, you couldn't. You would have to do a data
call. So that is an example of today, a system that is being
developed right now that isn't going to solve corporate
problems.
I think, when Mr. Lanzillotta was talking about the
culture, they are in the infancy stages of dealing with the
culture. They are going right now from uncontrolled
proliferation of business systems to trying to develop some
semblance of control and management oversight over the enormous
amount of money being spent on these business systems and I
think they are at the very early stages of getting control of
this and making it work the right way.
Senator Fitzgerald. Mr. Kutz, what should Congress be doing
about it?
Mr. Kutz. Well, I think one of the reasons, if you go back
to Mr. Lanzillotta talking about the budget cut, and I can only
speculate here, but the armed services put in a provision last
year that said all systems that have obligations over $1
million should go through a certain procedure and be approved
by the Comptroller before the obligation is made.
I have testified several times now that we identified $863
million of systems that were obligated that did not go through
that process. I think, quite honestly, they are a bit disturbed
that they passed a law and the Defense Department did not
follow it. And that gets back to the culture, because some of
the people that have even called us have said they don't even
know what the business enterprise architecture is, and these
are people working at the Chief Information Officers of some of
the services. They may be being clever in saying that, but it
may also be true that they don't know what it is. But whatever
the point is, there is probably billions of dollars of these
systems that are still being invested in that aren't
necessarily corporate solutions or consistent with the plan
that Mr. Lanzillotta is talking about for the architecture for
the Department.
Senator Fitzgerald. Is DOD just too big to ever get our
arms around it?
Mr. Kutz. No, I don't think so, and again, Mr. Walker
talked about something like the Chief Management Official that
we believe is an important aspect of this. And again, I would
agree that person alone cannot solve the problem, but that is
going to be someone who is a high-caliber person coming in to
lead an effort. It is a monumental challenge, but the level of
complexity is so much more difficult than anything you would
see in the Federal Government or private sector. If it was
easy, it would have been done decades alone.
Senator Fitzgerald. Mr. Lanzillotta.
Mr. Lanzillotta. Mr. Chairman, I agree with Mr. Kutz. I
sometimes disagree with the way he would implement it,
different recommendations. He is correct when we were
legislated to certify every system over $1 million.
Legislative change alone doesn't always make it possible
for us to get our arms around it. We had to develop databases.
We had to develop an inventory. We had to develop, to know what
those million-dollar systems are. We are in the process of
doing that.
We went out to industry, brought in a leading practice or
portfolio management, but one of the culture changes that had
to occur is we had to teach our domains. We had to teach the
people what portfolio management was. We had to go through. We
had to bring in people and say, this is how you do portfolio
management. We had to run everybody through on concepts on how
to develop portfolio management. And this year when they
deliver the POMS, the future year's program in the budgets in
August, we are set for everybody to go through and certify
their systems.
Now, one thing that we found out when we developed these
systems, and we are in the process of developing a database, in
the finance and accounting arena, I only have about--how many
systems is it, I think about, like, 20 systems that account for
about 85 percent of my dollars.
The first time, it is going to be ugly. We are going to go
through and we are going to look at this, but each year we are
going to get better at doing this. I don't believe we are at
the infancy stage--I would say maybe the adolescent stage of
doing this--but we have some maturing to go and I don't want to
miss Mr. Kutz's point. We still have some maturing to go on how
we do this.
But that is why I say, a legislative provision that says
you are going to certify 4,000 systems and review 4,000 systems
right now, we are trying. But I told the writers of that
legislation, fine, do that. We need you to do that. We need you
to give us the power to do that. But you also understand that
the first year, we are not going to be able to get it done.
There isn't enough staffing in the world, enough IT people in
the world that I could get to make this work.
Mr. Kutz. But one of the points I would make with that is
that Mr. Lanzillotta and the Comptroller sent out a policy memo
that said you are supposed to submit these systems to the
Comptroller, and the fact of the matter is, people did not
submit them. So there was a policy and a memo in place that
directed the services and everyone with the systems to do it.
They just didn't follow it. So it wasn't like the guidance
wasn't out there and people didn't know. And it is a separate
issue, is if those systems had all come in for approval,
whether they had the infrastructure to actually review them all
in a substantive way, but they didn't even come in.
Senator Fitzgerald. OK. We are getting close to one o'clock
and we are going to have to terminate this hearing. It has been
a wonderful hearing. I have one final question. I know, Mr.
Kutz, your office did a lot of research into the situation with
the unused plane tickets, for example, at DOD. I have a
somewhat related question.
I bumped into someone who owns a charter private jet
service, and he told me one of his biggest customers was the
Department of Defense and he was under the impression--he asked
me how he could get in and fly Senators around. I told him,
well, Senators fly commercial. And he said, ``They do?'' He
said, ``The officers at the Pentagon, they take private jets.''
And I said, well, like where? And he said, ``Well, between
Washington and St. Louis and other big cities.''
Is it true that officers fly private jets and charter
private jets at enormous expense to the taxpayers instead of
flying commercially?
Mr. Kutz. We have not investigated that issue before.
Senator Fitzgerald. Mr. Lanzillotta.
Mr. Lanzillotta. Mr. Chairman, I am going to have to say
you have got me. I know we own aircraft that we use for certain
levels of officers. They are usually four-star officers, combat
and commanders, service chiefs, to fly. We own those aircraft,
and those aircraft, we own them because of security needs,
because of communications gear that has to go in there, and
normal aircraft would not make that work. We also have certain
VIP aircraft and we use the VIP for several VIPs and different
types of VIPs to make trips. This is true. I was unaware that
we chartered. I will have to go back and investigate----
Senator Fitzgerald. Would you look into that and let me
know? I would be interested. Maybe it is that a jet wasn't
available, a military jet wasn't available for generals, and
then they chartered one. I would be interested, and I hope you
are able to get that information. I would appreciate that.
Mr. Lanzillotta. Mr. Chairman, for troop movements, we
charter aircraft all the time.
Senator Fitzgerald. Oh, I understand that. This guy rents
private jets for corporate executives, typically, and said some
of his best business was with the DOD and that kind of shocked
me. I just wanted to check into that.
All of you, thank you very much. You have been terrific
witnesses. I appreciate your time.
Mr. Lanzillotta, thank you for your service to the
government. I know it is a thankless job. I certainly would
never want to undertake cleaning up all of those systems over
at the Pentagon, and so thank you for your service. I thank all
of you for your service to the public. Thank you.
The record will remain open for additional statements until
the close of business next Wednesday, July 14. We appreciate
your being here.
This hearing is adjourned.
[Whereupon, at 1:01 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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