Office of the Under Secretary of Defense (Comptroller)

The Department of Defense (DoD) has achieved significant financial management success since 2001. These achievements benefit decision makers by making information more timely and accurate. Accomplishments included improvements in audit readiness, elimination of internal control weaknesses, and improvements in the effectiveness of financial operations. All were due in large part to developing a stronger financial management workforce.

Today, the Department is:

Ready to achieve a clean audit opinion in 2009 on more than two-thirds of its assets and liabilities, totaling $2.4 trillion;
On track to eliminate the remaining 19 of the original 116 managers' internal control weaknesses identified in 2001;
Improving efficiencies in financial operations, which lowers costs to the warfighter. The Defense Finance and Accounting Service has increased its productivity by 52 percent, resulting in $317 million in savings since 2001; and
Investing in its financial management workforce by establishing a first-of-its-kind Chief Financial Officer Academy. Today, more than half of OSD Comptroller staff members have at least one professional certification.

Department-Wide Clean Audit

The progress toward a DoD-wide clean audit is one of the Department’s most significant financial management accomplishments. In 2001, critics predicted that the Department’s leadership would not be able to turn around its complex financial management operations. Seven years later, DoD’s financial management has been transformed into a high-performing enterprise program that delivers critical information to decision-makers and warfighters to achieve mission success. In FY 2001, only $879 billion in combined DoD assets and liabilities received unqualified audit opinions. By FY 2007, DoD cleanly audited $1.3 trillion or 36 percent of all assets and liabilities. This accomplishment is due to the Department’s comprehensive Financial Improvement and Audit Readiness (FIAR) Plan (Figure 1).

The FIAR Plan was developed in 2005 to establish the timeline and milestones for improved financial management and to obtain a clean audit. To ensure transparency and maintain strong levels of confidence, the Department reports on its accomplishments by updating the FIAR Plan for Congress and the OMB every six months.

The September 2007 update of the FIAR Plan expanded on the Department’s incremental approach, incorporated lessons learned, and highlighted progress already achieved. Results achieved under the FIAR Plan within the last year included the following:

Figure 3.12 Progress Towards a Department-Wide Clean Audit

The U.S. Army Corps of Engineers received a qualified opinion on its financial statement audit for FY 2006 and FY 2007. The Corps is the largest DoD entity to receive a favorable opinion to date and the lessons learned are being applied across the Department; and
The Defense Information Systems Agency is undergoing an audit of its Balance Sheet, which portrays the Agency’s assets and liabilities. Favorable results in this area will provide the basis for auditing its remaining financial statements.

Progress towards a Department-wide clean audit will continue into FY 2009, when DoD expects to receive clean audit opinions on $2.4 trillion, which is more than two-thirds (68 percent) of the Department’s assets and liabilities. This achievement will be extraordinary since the new major Service financial systems will not yet be operational.

By FY 2010, the Department expects unqualified opinions for the U.S. Army Corps of Engineers, the Defense Information Systems Agency, the Medicare Eligible Retiree Health Care Fund, the TRICARE Management Activity, and the U.S. Marine Corps. This equates to 50 percent ($747 billion) of DoD’s assets and 89 percent ($1,818 billion) of its liabilities being audit-ready.

Improving Financial Stewardship

Stronger internal controls have reduced opportunities for waste, fraud, and abuse and increased efficiencies in several processes:

A reduction in self-identified internal control weaknesses from 116 to only 19 (Figure 2);
Zero material weaknesses in the DoD civilian pay system internal controls design, as reported by the Office of the Inspector General (OIG);

Figure 3.13 Reducing Internal Control Weaknesses

Praise from the Government Accountability Office for policies and controls over Premium Class Travel, that are examples for other Federal agencies to follow;
$452 million in duplicate payments prevented in FY 2005 alone;
A successful “Check It!” campaign that is championed by Deputy Secretary Gordon England and other top Department leaders and which is heightening awareness of internal controls throughout the Department; and
Audits conducted by the Defense Contract Audit Agency (DCAA) on $358 billion of contracts in FY 2007, that saved the Department $2.4 billion and provided to investigators with information that resulted in DoD recovering $225 million in 167 investigations.

Ensuring Continuous Improvements in Financial Operations

A robust metrics program and financial transformation effort delivered a dramatic 80 percent average improvement in accuracy and timelines:

The Department has reduced amounts owed to it from the public by 42 percent since December 2005, which increased the resources available to the warfighter;

The Department has embraced electronic invoicing as one of many efforts to reduce errors and improve efficiency. In 2004, DoD received 1.7 million electronic invoices per quarter (64 percent of total) and has increased that amount to 2.4 million (82 percent of total);
Since 2001, DoD has avoided $247 million in interest penalties by paying invoices on time, while experiencing a two-fold increase in the dollar amount of payments made. This means more budget dollars for operational needs instead of administrative expenses;
The Defense Finance and Accounting Service (DFAS), which provides accounting and finance services for the Military Departments and Defense agencies, increased its rate of operation and eliminated excess capacity, resulting in a 52 percent increase in productivity and lower costs to the Services by $317 million since 2001 (Figure 3);
The Department’s Fund Balance with Treasury account, which reflects the DoD budget available for spending, is nearly 100 percent accurate (Figure 4). This account reconciles DoD records with the Department of Treasury’s records. This helps to ensure that requests for additional taxpayer dollars are for true funding shortfalls;

Figure 3.14 Increasing DFAS Productivity while Lowering Costs

Figure 3.15 Reconciling DoDs Fund Balance with Treasury

DoD reduced inaccurate accounting records by over 96 percent, thereby reducing the risk of fraudulent transactions (Figure 5);
The accounts used by base commanders to manage funds received from outside the command – known as exempt clearing accounts – differed from the balances recorded at the Department of Treasury. Within three months of discovery, the Department corrected every account and has maintained 100 percent reconciliation with Treasury balances ever since;
Military and civilian personnel pay is more than 99 percent accurate for the three million active, Reserve, and retired military personnel and civilian employees paid each month. Not having to worry about being paid accurately allows DoD personnel to give their best to the task at hand;

Figure 3.16 Reducing Inaccurate Accounting Entries

The DoD OIG conducts operational audits and makes recommendations to improve efficiencies and operations within the Department. In FY 2007, the OIG auditors identified $697 million which was better aligned toward other warfighter needs; and
Today, 100 percent of GWOT cost reporting is traceable to an accounting system (92 percent) or a validated cost model (8 percent), providing better transparency for both the Congress and the American people.

As a result of efficiency improvements, DoD is able to pay invoices in a more timely manner, thereby reducing the cost of operations, reducing interest penalties, and improving relationships with vendors. This leads to better payment terms and attracts more potential vendors, which increases competition and lowers costs to the Department.

Improvements in financial management are also a result of the business transformation efforts established in the Enterprise Transition Plan, which focuses primarily on implementing new or updated systems into an integrated business network. Major goals and accomplishments include:

Implementing financial systems that comply with Federal financial management requirements. Several entities have successfully implemented pilots of modern integrated systems and are preparing for full system roll-out across the entire organization. The Navy, Army, Air Force, and Defense Logistics Agency all have pilot programs demonstrating huge successes;
Defining and implementing a common language – the Standard Financial Information Structure (SFIS) – that provides standard definitions and business rules that enable transparency and interoperability of financial information across the Department. This Structure now serves as the template for a government-wide financial data language; and
Implementing the Business Enterprise Information Service (BEIS) to aggregate financial information and provide Department-wide financial reporting. The BEIS will yield timely, accurate, and reliable financial information and enable comparison of financial data across the Department as never before. BEIS works with other financial management initiatives, such as SFIS, to provide for more informed financial decision-making.

The Department is also achieving greater efficiencies by investing in new financial accounting systems. Presently, six of twelve major financial systems have been completed. As these systems become operational, they deliver significant improvements in financial operations. For example, the Defense Logistics Agency (DLA) recently implemented an Enterprise Resource Planning System that has shortened order processing from one day to four hours, thereby getting material and supplies to the warfighter faster. This system has also streamlined end-of-year financial closing from nine days to two, making the financial information available to management sooner.

Recruit and Retain a professional Workforce

These accomplishments are due to DoD’s financial management professionals. They have worked with skill and dedication to improve the financial management of the world’s largest and most complex organization – and they have done so while DoD has been engaged in multiple conflicts and humanitarian missions. The Department is working to ensure that this progress continues by investing in the education and professional development of its financial management workforce:

DoD is providing retention incentives, such as financial assistance for employees seeking advanced degrees and professional certifications. Today, more than half of Comptroller staff members have at least one professional certification;
The Department is using innovative strategies to recruit employees, including the DFAS Leaders-in-Motion program, which has trained an average of 225 employees per year;
To make the most of employee talent, the Department is linking performance to its financial management strategy through the National Security Personnel System Individual Development Plans; and
DoD is also investing long-term in its workforce by initiating the Chief Financial Officer Academy at the National Defense University. This effort, similar to existing programs for Chief Information Officers, will help to form a more analytic and broadly skilled financial workforce that will provide value to the taxpayer and greater security to the Nation.

Summary

Since 2001, the Department of Defense has measurably improved financial management to provide decision-makers timely and accurate information to support our warfighters. Today, the Department's fiscal information, including the Consolidated Balance Sheet (Figure 6), provides a more complete depiction of DoD's financial health then ever before. This progress will continue because the Department has strategically invested in its workforce and a detailed plan to achieve optimal financial operations and to obtain a Department-wide clean audit.

Figure 3.17 Consolidatin Balance Sheet