<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:84603.wais]
THE DEPARTMENT OF DEFENSE: WHAT IS BEING DONE TO RESOLVE LONGSTANDING
FINANCIAL MANAGEMENT PROBLEMS?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
FINANCIAL MANAGEMENT AND
INTERGOVERNMENTAL RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
MARCH 20, 2002
__________
Serial No. 107-157
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania THOMAS H. ALLEN, Maine
DAVE WELDON, Florida JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia ------
JOHN J. DUNCAN, Jr., Tennessee BERNARD SANDERS, Vermont
------ ------ (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations
STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida MAJOR R. OWENS, New York
DOUG OSE, California PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Earl Pierce, Professional Staff Member
Justin Paulhamus, Clerk
David McMillen, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on March 20, 2002................................... 1
Statement of:
Jonas, Tina W., Deputy Under Secretary for Defense, Financial
Management, Department of Defense, accompanied by Thomas R.
Bloom, Director, Defense Finance and Accounting Service,
Department of Defense; and De W. Ritchie, Jr., Acting
Deputy Chief Financial Officer, Department of Defense...... 22
Kutz, Gregory D., Director, Financial Management and
Assurance, U.S. General Accounting Office, accompanied by
Randolph C. Hite, Director, Information Technology Systems,
U.S. General Accounting Office; and David R. Warren,
Director, Defense Capabilities and Management, U.S. General
Accounting Office.......................................... 3
Lieberman, Robert J., Deputy Inspector General, Department of
Defense.................................................... 36
Letters, statements, etc., submitted for the record by:
Jonas, Tina W., Deputy Under Secretary for Defense, Financial
Management, Department of Defense:
Information concerning schedule and program plans........ 54
Prepared statement of.................................... 26
Kutz, Gregory D., Director, Financial Management and
Assurance, U.S. General Accounting Office, prepared
statement of............................................... 5
Lieberman, Robert J., Deputy Inspector General, Department of
Defense, prepared statement of............................. 38
Schakowsky, Hon. Janice D., a Representative in Congress from
the State of Illinois, prepared statement of............... 49
THE DEPARTMENT OF DEFENSE: WHAT IS BEING DONE TO RESOLVE LONGSTANDING
FINANCIAL MANAGEMENT PROBLEMS?
----------
WEDNESDAY, MARCH 20, 2002
House of Representatives,
Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 1 p.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn and Schakowsky.
Staff present: J. Russell George, staff director and chief
counsel; Bonnie Heald, deputy staff director; Rosa Harris,
professional staffmember and GAO detailee; Earl Pierce,
professional staff member; Justin Paulhamus, clerk; David
McMillen, minority professional staff member; and Jean Gosa,
minority assistant clerk.
Mr. Horn. I think everybody is here. We have Mr. Kutz, Mr.
Hite, Mr. Warren, Ms. Jonas, Mr. Bloom, Mr. Ritchie, and Mr.
Lieberman. OK. If you don't mind, we'll have you rise and raise
your right hand.
[Witnesses sworn.]
Mr. Horn. The clerk will note that they've all affirmed.
We will start with my opening statement, but we will have
to recess in a little while because two more votes have popped-
up on the floor.
A quorum being present, this hearing of the Subcommittee on
Government Efficiency, Financial Management and
Intergovernmental Relations will come to order.
We are here today to continue our examination of the
progress executive branch departments and agencies in the
Federal Government are making toward providing timely and
useful information. Encouragingly, an increasing number of
agencies were able to produce clean, auditable financial
statements and made marked improvements in their financial
management systems. However, this progress was often achieved
through difficult and costly efforts. Despite that progress,
the failures of the few agencies continue to tarnish the
overall record of the executive branch.
The Department of Defense still cannot adequately account
for the billions of tax dollars it spends. For example, the
Department has issued more than 230,000 purchase cards to
employees who use the card to buy $1.8 billion worth of goods
and services last year, yet a recent General Accounting Office
audit of only 300 accounts found numerous cases in which the
Government-guaranteed credit card had been inappropriately or
fraudulently used.
For the sixth consecutive year, the Department's Inspector
General has been unable to render an opinion on the reliability
of the Department's financial statements. For fiscal year 2001,
to Office of Inspector General limited its internal control
review to examining the status of the corrective actions
relating to material weaknesses that had been reported in prior
audits.
In addition, for fiscal year 2001 the Inspector General did
not test for compliance with the Federal Financial Management
Improvement act of 1996, but relied on the Department's
acknowledgement that many of its systems do not comply with the
act.
For the last 5 years, the Department of Defense received
the unacceptable grade of ``F'' on the subcommittee's financial
management report card, which is one of the primary reasons the
Federal Government is unable to prepare auditable financial
statements. The Department of Defense's financial management
and feeder systems simply cannot provide adequate evidence to
support various material amounts on the financial statements.
The Department of Defense relies on non-integrated systems
that are prone to errors. The GAO--the General Accounting
Office--has reported that the Department of Defense's financial
management systems reform will take years to complete.
For fiscal year 2001, alone, the Department of Defense
reported total information technology investments of almost $23
billion. Despite the billions invested in modernizing its
financial management systems, the Department does not have a
plan in place to guide and direct these investments.
In today's hearings we will focus on what the Department of
Defense is going to do to resolve these longstanding issues. I
welcome today's witnesses and look forward to working with you
to ensure financial accountability throughout the Federal
Government.
I might add that Secretary Rumsfeld made it very clear
yesterday that he won't tolerate what has happened in terms of
the purchase cards and that he intends to do something about
it. I'm glad that Secretary Jonas is here too.
We will now start with--well, I'm going to check to see if
I need to go vote. Yes, we have about 6 minutes, so have a
rest.
[Recess.]
Mr. Horn. The Nation has been saved. We stopped a motion
that allowed us to be out and not still work. Sorry for going
over there and holding you all up, but we will now start with
Gregory Kutz, the Director of Financial Management and
Assurance, U.S. General Accounting Office.
STATEMENTS OF GREGORY D. KUTZ, DIRECTOR, FINANCIAL MANAGEMENT
AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY
RANDOLPH C. HITE, DIRECTOR, INFORMATION TECHNOLOGY SYSTEMS,
U.S. GENERAL ACCOUNTING OFFICE; AND DAVID R. WARREN, DIRECTOR,
DEFENSE CAPABILITIES AND MANAGEMENT, U.S. GENERAL ACCOUNTING
OFFICE
Mr. Kutz. Mr. Chairman, it is a pleasure to be here to
discuss financial management at the Department of Defense. The
recent successes of our forces in Afghanistan has again
demonstrated that our military forces are second to none;
however, the same level of excellence is not evident in many of
DOD's processes, including financial management.
DOD's financial management problems date back decades, and
previous attempts at reform have largely proven unsuccessful.
Problems with DOD financial management go far beyond its
accounting and finance systems and processes. DOD's network of
business systems was not designed, but rather has evolved into
an overly complex and error-prone operation, with little
standardization across the Department, multiple systems
performing the same tasks, the same data stored in multiple
systems, and significant manual data entry. Some of the systems
in operation today date back to 1950's and 1960's technology.
Past reform efforts have not succeeded, despite good
intentions, and the conditions that led to those reform
initiatives remain largely unchanged. As a result, the DOD has
fundamentally flawed financial management systems and a weak
overall internal control environment.
My testimony has two parts: first, the root causes of DOD's
inability to effectively reform its business operations, and,
second, the keys to successful reform.
First, we believe the underlying causes of the chronic
financial and business reform challenges include: lack of
sustained top-level leadership and accountability; cultural
resistance to change, including service parochialism; lack of
results-oriented goals and performance measures; and inadequate
incentives for seeking change.
Let me briefly touch on two of these--the challenges
relating to leadership and culture.
In our Executive Guide on World-Class Financial Management,
the leading organizations we surveyed, including General
Electric, Boeing, and Pfizer, identified leadership as the most
important factor in making cultural change and establishing
effective financial management. DOD's past experience has
suggested that top management has not had a proactive,
consistent, and continuing role in leading financial management
reform.
Sustaining top management commitment to performance goals
is a particular challenge for DOD. In the past, the
Department's top political appointees' average tenure of 1.7
years has served to hinder long-term reform efforts.
Cultural resistance to change and military service
parochialism have also played a significant role in impeding
previous reform efforts. I testified before this subcommittee
last week on the culture at a Navy unit in San Diego that
dismissed the need for internal controls and allowed abusive
usage of Government purchase cards.
All parts of DOD will need to put aside their parochial
interests and focus on Department-wide approaches to financial
management reform.
My second point relates to the key elements necessary for
successful reform. My written statement discusses seven
elements necessary for reform. I will touch on two of those
seven now.
First, the financial management challenges must be
addressed as part of a comprehensive, integrated, DOD-wide
business process reform and improvement strategy cannot be
developed in a vacuum.
Financial management is a cross-cutting issue that affects
all of an organization's business processes. Currently, DOD has
six of the twenty-two agency-specific high-risk areas in the
Federal Government, including systems modernization and
inventory management. In addition, our two Government-wide
high-risk areas, human capital strategy and computer security,
are also relevant to DOD. These inter-related management
challenges must be addressed using an integrated, enterprise-
wide approach.
Second, establishing and implementing an enterprise-wide
financial management architecture will be essential for the
Department to effectively manage its modernization effort. The
Clinger-Cohen Act requires agencies to develop, implement, and
maintain an integrated systems architecture. Such an
architecture can help ensure that the Department invests only
in integrated, enterprise-wide business system solutions.
Building systems without an architecture is like building a
house without a blueprint.
And the stakes are high. For fiscal year 2001, DOD reported
total information technology investment of about $23 billion.
Without an architecture, DOD risks spending billions of dollars
that will only result in perpetuating the existing complex,
stovepipe, and high-maintenance systems environment.
In summary, we support Secretary Rumsfeld's vision for
transforming the Department's full range of business processes.
The benefits of business reform are substantial. The Secretary
estimated that DOD could save 5 percent of its budget, which
would be $15 to $18 billion annually, through successful
business reform.
Today the momentum exists for reform, but the real question
remains: Will this momentum continue to exist tomorrow, next
year, and throughout the years to make the necessary cultural,
systems, human capital, and other key changes necessary a
reality.
For our part, we will continue to work constructively with
the Department and the Congress on these reform issues.
Mr. Chairman, this concludes my testimony. I have Randy
Hite and Dave Warren with me to answer questions.
Mr. Horn. We thank you very much.
[The prepared statement of Mr. Kutz follows:]
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Mr. Horn. We now have Tina W. Jonas, Deputy Under Secretary
for Defense, Financial Management, Department of Defense. When
we were voting recently, I met with Mr. Lewis and said you were
going to turn the Department around, and he said,
``Absolutely.''
Ms. Jonas. We are trying mightily.
STATEMENTS OF TINA W. JONAS, DEPUTY UNDER SECRETARY FOR
DEFENSE, FINANCIAL MANAGEMENT, DEPARTMENT OF DEFENSE,
ACCOMPANIED BY THOMAS R. BLOOM, DIRECTOR, DEFENSE FINANCE AND
ACCOUNTING SERVICE, DEPARTMENT OF DEFENSE; AND DE W. RITCHIE,
JR., ACTING DEPUTY CHIEF FINANCIAL OFFICER, DEPARTMENT OF
DEFENSE
Ms. Jonas. Thank you, Mr. Chairman and members of the
committee. I am pleased to be here to give you an update on the
Department's financial management reform program. I wish to
reaffirm the commitment to financial management reform that we
made to you last year. Our goal for financial management reform
is profound and far-reaching. We intend to provide the
Department's decisionmakers with financial data that is
reliable, relevant, and timely so that they, in turn, can
carefully and efficiently manage and account for taxpayer
funds.
You cannot change anything unless you get your arms around
the problem, and we are beginning to get our arms around the
extent of our problem. We are taking five basic steps to
achieve successful financial reform. We are rebuilding our
financial management infrastructure to include renovating our
information systems and business processes. We are improving
the quality of the processes we use to prepare financial
statements, and we are developing and using performance
measures to target areas for improvement. We are also ensuring
that components safeguard their assets from fraud, waste, and
abuse, and we are developing procedures to build and maintain a
highly motivated professional financial work force.
Our first step is building a robust financial management
infrastructure. Our program targets two primary causes of the
Department's extensive problems. These are the uncontrolled
proliferation of antiquated and stand-alone financial
management systems and the inefficient business processes that
they support.
It is important to note that our financial systems were
developed to support the budget appropriations process, but,
unfortunately, they do not generate the type of financial
information necessary for the Department's decisionmakers and
they do not incorporate standard accounting principles as
required by law. We intend to fix this.
The proliferation of systems can be seen in the inventory
diagram here. There's a board over there, and it's on the
screen, Mr. Chairman, that represents over 673 financial and
what they call ``feeder systems''--in other words, systems that
produce data that is relevant or necessary for financial
reporting.
The slide or the chart, aside from it, is the chart that
GAO used last year when I came to see you. They thought that
spider chart--I call that the spider chart--was a problem. The
work we have been doing has identified and validated that mess.
There are 1,500 different what they call ``interfaces.'' So, I
think very explicitly and graphically that shows you the extent
of the Department's problem. I was informed by my team this
morning that we have discovered another 200 systems.
So many of the things that we are dealing with, all the
problems in reporting--the inability to get financial
statements on time--stem from that mess, and it is going to be
a very difficult task to try to clean-it-up, but we are going
to get to that.
We are modernizing our business processes so that we can
produce financial information. We are eliminating as many
systems as possible and integrating standards and standardizing
those that remain. We are creating an enterprise architecture
that will serve as a plan of action linking systems and
business processes in a comprehensive and integrated fashion.
These processes are now isolated from each other across
functional areas. The functional areas, as I mentioned earlier,
these include healthcare, inventory, and other areas.
Our enterprise architecture will also outline Department-
wide financial management standards and prescribe stringent
internal controls.
We expect to complete this architecture by March 2003, and
we will be looking toward six pilot sites and prototyping the
system by 2004.
Just as a note here, we will be briefing the Deputy
Secretary tomorrow and the service Secretaries on the status of
our plan, so the Secretary gets routine briefs on where we are.
Essentially, what I am describing for you, Mr. Chairman, is the
approach that Greg has just discussed with you on an enterprise
architecture--that is, creating a blueprint that will guide our
financial investments in the future and will hopefully get us
to a point where we're not spending so much money on
inefficient processes.
In addition to developing a robust financial
infrastructure, we are addressing many of the Department's most
intractable financial problems, including those that prevent
the Department from receiving a clean audit opinion. For
example, we are working to change the way the Department
accounts for ships, tanks, aircraft, and other military
equipment, and we want to give our managers and the public a
clear view of the full cost associated with these items.
We are developing more accurate methods to estimate our
environmental liabilities so that we know what it costs to
clean them up.
We are improving our ability to estimate retiree healthcare
costs. Our enhanced healthcare program will help us to budget
for future healthcare costs more accurately. Our goal is to
improve the quality of healthcare for our retirees.
We are also balancing our checkbook with the U.S. Treasury,
so knowing exactly how much money we have in our Treasury
accounts helps to ensure that we spend only the funds
appropriated to us by Congress.
And, fifth, we have made considerable progress in
documenting adjustments to our books, thus improving audit
trails.
Another area, Secretary Rumsfeld has stated--known to state
that if we cannot measure it, we cannot manage it. We have
begun to use performance measures to target areas for
improvement, and our data shows that we are making progress.
For instance, we are doing a better job of paying our bills
on time. From April 2001, to October 2001, we reduced the
backlog of commercial payments by 41 percent. This improves our
business relationships and reduces wasteful interest payments.
For example, when I came in I realized--I started to ask for
performance data, and they suggested that we were spending $40
million a year on interest payments. That's something that is
just untenable, so we're using performance measures to
understand. We brought that down, I think, by at least $12
million over the past year.
We are also trying to do a better job of accurately
recording payments so that we know the status of our funds. We
decreased our payment recording errors by 44 percent between
January, 2001, and October 2001. We have also reduced our
travel card payment delinquencies by 34 percent between
January, 2001, and December, 2001, for cards held by
individuals, and during the same period of time we reduced
delinquencies related to cards held by DOD organizations by 86
percent.
We are trying to demonstrate to the Congress and to others
that we want to measure our progress and understand where we
are, particularly in the travel card area. This is very
critical, and Dr. Zakheim--I get monthly briefings on where we
are, and we're trying to drive the numbers to an acceptable
level.
We are also aggressively collecting money that contractors
owe us, overpayments. We have identified over $53 million worth
of overpayments, and we have collected as much as $31 million
so far, and we continue to seek to get the rest of the returns
on that, on those overpayments.
Concurrent with our review of policies and procedures we
are making enforcement of internal controls a top priority, and
we are looking very closely at our overall internal controls
program, with a specific focus on credit cards.
Mr. Chairman, since I was here last week and we discussed
this a little bit, the Secretary has put together a task force.
That task force has met on a routine basis, and Tom is part of
that task force. He may have the actual hours committed to
that. But we are looking exactly at what has been done, what
has not been done, what administrative remedies we have, what
we must do for proper control. Don Zakheim has personally
spoken to the acting IG, and we're going to invite Justice on
the task force, so we hope to have some solid answers for this.
I guarantee you the Secretary is personally involved in this.
You asked me last week whether or not the service
Secretaries have been discussed--this has been discussed with
the service Secretaries. I guarantee you it has. So hopefully
we will make some progress in those areas.
I covered--Monday the Secretary had asked Dr. Zakheim to
meet with the senior leadership and he did so, and I just
mentioned the task force that we are involved with.
So, Mr. Chairman, we are also, just as a final note--and I
don't want to give it short shrift, but we're also--we had a
human capital work group. The financial work force is critical.
I think Greg has talked about this many times, David Walker has
talked about it. We're serious about improving the financial
management work force and the credentials of that work force,
and we may be seeking legislation on some particular matters
associated with that.
Thank you, Mr. Chairman. I appreciate the opportunity to
testify.
[The prepared statement of Ms. Jonas follows:]
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Mr. Horn. Well, that's a good report, and we're glad to
hear about what is happening. I look forward to the conclusions
and summaries of the task forces that cut across the services,
because if we don't do it down there it will never get done at
the top, and it should be standard at the top. I think you are
there to do it and we will work with you.
Now, Mr. Bloom and Mr. Ritchie, I assume are here for
questions, or do they have something?
Mr. Bloom. Yes, for questions.
Mr. Horn. OK. So our last presenter is Robert J. Lieberman,
Deputy Inspector General, Department of Defense.
STATEMENT OF ROBERT J. LIEBERMAN, DEPUTY INSPECTOR GENERAL,
DEPARTMENT OF DEFENSE
Mr. Lieberman. Thank you, Mr. Chairman.
My written statement addresses the results of our audits of
the Department of Defense year-end financial statements for
fiscal year 2001. It also summarizes the most significant of
our many audit reports on financial management issues over the
past year. Two of those reports, in March 2001, and January
2002, discuss the crucial efforts to modernize the vast array
of information systems that generate financial data and to
achieve compliance with new accounting standards. For several
years we have reported and testified that these system
development and modernization projects are high-risk because of
historically fragmented management and the poor DOD track
record for information technology system acquisition and
control.
Since 1999, we have been advocating the application of the
successful Year 2000 conversion management techniques to the
task of revamping these systems. We've also stressed that the
primary focus needs to be on generating useful financial
information, not just clean audit opinions.
I am pleased to report today that the Department's new
approach is very much along the lines that we have been
suggesting. Therefore, we are very supportive of this effort,
beginning with the major and difficult initiative to develop a
comprehensive financial system architecture.
I would be remiss, though, not to warn that there are
undeniable risks. Specifically, development of the architecture
could take longer than anticipated, the end product might leave
numerous issues that are hard to resolve, the cost to implement
the architecture might be prohibitively expensive, or the DOD
might lack the discipline over time to make system program
managers conform to the architecture.
Nevertheless, the Department has taken a major step forward
by accepting the premise that the financial management
improvement effort needs to be treated as a program in its own
right, with all the management controls that a very large
Government program should have. Those include a master plan,
well-defined management accountability, full visibility in the
budget, regular performance reporting, and robust audit
coverage. We believe that the DOD is making a good faith effort
to create a strong management structure for this effort.
We look forward to assisting with timely and useful audit
advice, just as we did during the Year 2000 conversion.
Likewise, we welcome the emphasis in the President's
management initiatives on controlling erroneous payments. As
the Department of Defense pursues the goal of greatly improved
financial reporting, we must also keep focused on the need for
better controls in many facets of its day-to-day finance
operations and closely related purchasing activities such as
the use of Government credit cards.
As mentioned in my written statements, there have been 382
audits of the purchase card program and 31 audits of the travel
card program. More reports on them, as well as the aviation
card program, are in the pipeline. In fact, we plan to issue a
major IG report with numerous recommendations for improvement
to the purchase card program later this month.
Moreover, numerous criminal investigations involving credit
card misuse are in progress, as well as proactive investigative
research efforts intended to identify abuses of credit card
privileges. The Defense Criminal Investigative Service, which
is part of the Office of the Inspector General, currently has
17 open cases involving misuse of Government credit cards.
Cooperation from senior DOD managers on this subject has been
exemplary, and we welcome the latest initiatives.
Everyone agrees that much more need to be done to improve
local level management controls. I will close by noting that,
despite unacceptably weak controls at some DOD activities,
particularly in the Navy, it is wrong to assume that there is
little peril for individuals who abuse their Government credit
card privileges. Recent criminal convictions illustrate that
abusers of Government credit cards actually take considerable
risk. To underscore that point, my written statement includes a
list of examples of recently closed cases on felony frauds
involving the misuse of DOD credit cards.
Again, thank you for soliciting our views in this matter.
That concludes my summary.
[The prepared statement of Mr. Lieberman follows:]
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Mr. Horn. Well, thank you very much. I appreciate the one-
pager of examples of Defense Criminal Investigative Service
cases on credit card fraud. How many of those had some sort of
sanction? Were any of them let off by either the U.S. Attorney
or the particular judge, or what?
Mr. Lieberman. On that particular list, every single
example is a conviction and a sentence. Some of the sentences
are not particularly heavy, but that is the way the criminal
justice system works, and, of course, the Department of Defense
has nothing to say about the sentencing.
Mr. Horn. I see some of the others actually had
imprisonment.
Mr. Lieberman. Yes, sir.
Mr. Horn. Yes.
Mr. Lieberman. And for white collar offenses like that, in
all these cases first-time white collar offenders, some of
those are considered heavy sentences in those parts of the
country.
Mr. Horn. I now yield to the ranking member, Ms.
Schakowsky, for her statement.
Ms. Schakowsky. Thank you, Mr. Chairman. Here we go again,
and I'm glad that we are. We are here today because once again
the Department of Defense has failed to produce a set of books
that could be audited. Unfortunately, this isn't news. It
actually should be news. I wish there were more attention to
this fact. Even though the Defense Department is responsible
for half the total discretionary spending of the Federal
Government, over $300 billion, they don't have enough respect
for the American public to keep a clean set of books.
This is Enron accounting ten times worse. I find this
particularly disturbing because the men and women who put their
lives on the line for this country are not the ones responsible
for these failures. It's the military bureaucrats at the
Pentagon and around the country who keep the books.
If they're failing the American public in this way, I
wonder in what other ways they are failing those men and women
who are putting their lives on the line.
In 1995, the GAO put the Defense Department financial
management on the high-risk list. One of the issues raised then
by the GAO was the failure of the Department to protect its
assets from fraud, waste, and abuse. Last week, we saw just how
vulnerable the Department is to fraud in the area of purchase
cards, which has been discussed already. Millions of dollars in
personal items, trips, and even plastic surgery were charged to
Government-issued credit cards. The financial mismanagement
continues at the Pentagon.
Seven years ago the GAO reported that the Defense
Department was unable to reliably report on the cost of its
operations--7 years ago. Today that remains a problem. Seven
years ago the GAO reported that the Defense Department was not
properly reporting billions of dollars of future liabilities
associated with environmental liabilities. Today, that remains
a problem. Seven years ago the GAO reported the Defense
Department was unable to protect its assets from fraud, waste,
and abuse, and today that remains a problem.
Twelve years ago the GAO reported that the Defense
Department's inventory management was a high-risk for failure,
and today that remains a problem. Twelve years ago the GAO
reported that the weapons system acquisition was a high-risk
for failure. Today that remains a problem.
The list goes on and on, and we've heard lots of talk and
we have not seen any progress.
As I pointed out last week, the problems, in my view, is
not systems or training or organization, and Mr. Kutz mentioned
that today. The word I am looking for is the culture at the
Department of Defense.
The mission of the Department is critical to our safety and
welfare; unfortunately, the bureaucracy has taken the
importance of that mission and turned it into impudence.
These failures to account for the cost of programs to
properly identify environmental costs, protect against fraud,
are not just the dry, arcane stuff of accounting, these are
examples of how the Department abuses the public trust, wastes
billions of dollars, and in the process asks for more.
Today we will hear again--we are hearing again how the
Department is going to correct these problems, and I have to
say that, frankly, I see no reason to believe those responses
at this moment. Last July we were told that the credit card
issue would be addressed; instead, it was business as usual,
fraud, waste, and abuse. And why should we not expect the same
today? That's really the nature of the questions that I want to
be asking. Why should we have any confidence in this?
I think that these questions ought to be the central part
of the debate when we look at the $48 billion increase, the
$400 billion Defense budget that is being asked for. Why should
we expect that these problems won't be there next year and next
year and next year?
Thank you, Mr. Chairman.
[The prepared statement of Hon. Janice D. Schakowsky
follows:]
[GRAPHIC] [TIFF OMITTED] 84603.038
[GRAPHIC] [TIFF OMITTED] 84603.039
Mr. Horn. If you'd like to use the 10-minutes now for
questions, I'll yield 10 minutes to you.
Ms. Schakowsky. Thank you.
Mr. Lieberman, in a recent report your office criticized
the Department. I can't get past this number--$1.2 trillion in
Department-level accounting entries which were unsupported
because of documentation problems or improper because the
entries were illogical or did not follow generally accepted
accounting principles.
How can this happen?
Mr. Lieberman. The number you're referring to was in our
report last year on year-end financial statements for fiscal
year 2000. The direct answer to your question is that, because
those systems outlined on those two different charts they are
incapable of generating accurate reports, the Department has to
go through a convoluted series of procedures, work-arounds that
are both inefficient and just simply don't work in terms of
leaving an inadequate audit trail.
Ms. Schakowsky. This is so obvious, though.
Mr. Lieberman. Yes.
Ms. Schakowsky. It is so obvious to everyone. Were you
waiting for this subcommittee to act or to raise questions? I
mean, anybody could look at that and say that. So why wasn't
something done earlier, and why has it still not happened, even
when repeatedly that has been pointed out by you and others?
Mr. Lieberman. Yes, ma'am. That was pointed out when the
Chief Financial Officers Act was passed. I remember hearings
with this committee when it was called ``Government
Operations,'' and we were saying back then the Department will
have to completely revamp its information systems in order to
do this, and that is a monumental effort, requiring a lot of
intensive management attention, which, frankly, I don't think
the problem got throughout the decade of the 1990's.
Ms. Schakowsky. And why is that?
Mr. Lieberman. A combination of the Department having other
priorities and the Congress having very on-again/off-again
interest from year to year on how much progress was being made.
Ms. Schakowsky. Accumulating over time to $1.2 trillion in
such transactions that we just can't adequately account for or
sensibly, logically account for.
Mr. Lieberman. When we first started doing these year-end
financial statement audits, we did not try to quantify the
value of the unsupported transactions. We only actually tried
to do that starting 2 or 3 years ago. So I don't know what the
number was when DOD first started, but it would have been
astronomical, because what that number tells you is the systems
are incapable of doing the kind of job that a corporation's
systems can do when they put together an auditable financial
statement.
Ms. Schakowsky. But it is not as if these systems and
processes are beyond our grasp. It is not that we didn't know
there was a problem. It is not that we didn't know that the
problem was of astronomical proportion. It's just there was no
will to do that.
Mr. Lieberman. I won't argue with your statement, ma'am,
because I have said many of the same things.
Ms. Schakowsky. Yes.
Mr. Lieberman. I think, in addition to a lack of will, it
has been a matter of organization. The way the Department is
organized, all those different systems belong to many different
organizations within the Department. There is nobody at the
Assistant Secretary level who owns all of them. And getting the
different parties involved to focus on the particular challenge
of improving financial management reporting has proven to be
very, very difficult because those other managers had their own
priorities and there wasn't strong enough central leadership.
The problem here is no tougher than the Year 2000 problem
that I alluded to earlier. I know Chairman Horn probably
remembers well that he had hearings when we all sat here and
said, ``Gee, the Department just discovered another few hundred
systems.'' We were still doing that well into the fall of 1999.
But there was very strong and sustained central management
interest, and everybody in the Department ended up marching in
the same direction. It took 2 years of many a critical audit
report and many a nasty meeting, but then Deputy Secretary
Hamry kept pounding on people to get over the finish line and
they did, and it was a successful conclusion to an enormous
management challenge.
This one hasn't had quite the sex appeal that one did. What
is going on and how much is being spent has always been
somewhat of an unknown. There was never one place you could go
to to say, ``How much are we spending on this this year?'' The
numbers simply didn't exist, incredibly, when you think about
it, because we're talking a multi-billion-dollar government
program. But there was not a program structure with someone in
charge, a clear roadmap, as Ms. Jonas is talking about. You've
got to have a roadmap of where you want to go and then set
milestones and expect people to report where they are against
those milestones. Over the years we never had any of that. We
always had just a vague notion that we were moving forward.
And a lot of money was spent during the 1990's. It's not
that there hasn't been a lot of activity. Unfortunately, it has
not been efficiently focused.
Ms. Schakowsky. I think there is actually a lot of--you put
it ``sex appeal'' to this issue. If the American people
really--if this message really got out, even just the credit
card aspect, which I think is a small part of it, I think that
there would be a lot of interest. People would be very upset if
we were successful in really--I think the Department has been
lucky, actually, that this is not widely known among the
American people, who would feel very betrayed, I think, if that
got out.
Let me ask you this. Our colleague, Representative
Kucinich, has proposed the following language be added to our
budget views: ``Except for funds to be used directly for
homeland security, the subcommittee opposes any increase in the
Department of Defense budget unless the Department passes a
test of an independent audit.''
I'd like to get your reaction to this proposal, and overall
why--and, Ms. Jonas, feel free to answer this--why we shouldn't
take some sort of direct action instead of just these hopeful
kind of hearings.
Ms. Jonas. Well, and I appreciate that because the spirit
of the Congressman's legislation I personally would agree with.
The problems I was describing earlier and the practicality--
when I first got into this job, I asked some very fundamental
questions. We have known that systems, in general, have been a
problem, but it has never been clearly defined to the point
where you could start to resolve the problem, so one of the
basic questions I asked was: What's the extent of the problem?
Nobody could tell me. I asked how much we were spending on
these systems. Nobody could tell me.
So for several months we have had a good task force of
people, which is now part of the structure of the Comptroller's
Office, investigating, looking at this very carefully. This
diagram is not just a posterboard. That represents a huge
amount of data. It tells us every little linkage that we have,
and we needed to have that in order to fix it.
We must get to a point where the systems will routinely
provide the type of information that the Congress deserves. It
absolutely deserves it. I think everybody at this table would
agree with the sentiments expressed here, your sentiments that
it is inexcusable. So we must get to that.
I think we have--I don't have it with me, but we do have
our schedule and our program plan laid out. I'd like to submit
that for the record, if that's all right, so that you can see
what progress we expect to make and, you know, how we are
measuring yourselves, if that's all right.
Mr. Horn. Without objection, that will be in the record.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] 84603.040
Mr. Horn. The clerk should get copies here.
Ms. Schakowsky. OK. The Secretary is adamant and we are
very hopeful with his leadership we can get this raised to the
level. I've known John Hamry for years, and John tried very
mightily and did a great job on the 2002--the 2000 problem. We
need that kind of sustained leadership. That is why we've set
up an executive committee to deal with this and a steering
group at my level to work through these issues. It is the only
way to get the problem solved.
So we have got a lot of work to do. It is huge. But your
basic question, we should be able to comply with that law and
we intend to try to get there as soon as we possibly can.
Mr. Horn. Let me pursue some of these issues. When the
National Security Act brought in not only the CIA but the
National Security Council and certainly the Department of
Defense under the Truman administration, implemented in part by
the Eisenhower administration, and Secretary Forrestal as we
all know, had difficulties, and he probably just didn't know
what he was in for. He had been a very able Secretary of the
Navy, but once you got into the complexity and the services are
fighting with each other, and his successor, as I remember
Louis Johnson, decided that, ``Well, I'll just give them each
one-third of the budget.'' That's what it was, and so it was
submitted to Congress in that way.
Now, when we got into the systems bit, the computer systems
versus the accounting system, obviously computers used for the
accounting system, but the first Secretary should have said,
``Folks, we're going to have one accounting system and we're
going to have it for the services and we're going to have it
for the overall Department of Defense.'' Nobody did that.
I'm curious, Mr. Lieberman--you could probably write a
great memoir on this, and that is, when Mel Laird was Secretary
of Defense and David Packard of Hewlitt Packard, he was a
brilliant student at Stanford in the early 1930's, and he came
back here and he was one tough hombre in terms of being Deputy
Secretary. Now, he also wanted to turn that place around, and
I'm just curious, were you there when he was there?
Mr. Lieberman. Yes, I was. I was afraid for a minute you
were going to ask me if I was there when Forrestal was there. I
don't go back quite that far.
Mr. Horn. And I wasn't going to ask you about General
Grant, either. [Laughter.]
General Grant was for a Department of Education. We've now
got one. It took about a century, but things are going good.
So tell me about--did David Packard, who was an
industrialist and knows what it is to have a very tough-minded
central group and getting the things done, so I'd be curious
what he did or didn't do.
Mr. Lieberman. As I recall, his primary focus was on
weapons system acquisition.
Mr. Horn. Yes.
Mr. Lieberman. Trying to make sure that the different
systems being bought by the different services didn't duplicate
each other, and hammering out a lot of very difficult budget
issues. In his day, the Defense Department budget was not
growing and there was great difficulty in modernizing the
forces. So I don't remember him being an active player in
financial management, frankly. The first time I remember a
concerted effort to try to get a handle on this financial
management system problem was really in the ill-fated corporate
information management initiative, which was launched under
Secretary Cheney's deputy, Don Atwood, and it just did not have
the support within the Department at the time and sort of
petered out by the mid 1990's.
Mr. Horn. Well, I got into the Y2K bit, and Mr. Hamre, as
you suggest, really threw his heart into it and tried to get
things done. And, as I remember, it started with 149 accounting
systems, and when I said that, the next hearing a couple of
hundred more, just as you found, were there, and they kept
coming out. Nobody could ever get their handle on that. Of
course, as Secretary Forrestal said, as I noted, they should
have had one and his successor should have stuck with one
unless there was something wrong with it and make sure that it
is integrated and related with all the services.
So that's one of your problems that you face, Madam
Secretary, and we've got to get the type of things that
executives need before them if they are going to know what the
options are.
What else is needed over there? Heaven knows we give them a
lot of money.
Ms. Jonas. Well, I really think the sustained support of
the Congress. We recognize, you know, this is a culture
problem, and to the extent that we can have the support of the
Congress--OMB has been very good. You know, they have a
watchful eye over us, as does the GAO and the IG, but we need
to demonstrate to the culture that this is unacceptable, and
changing culture is a very difficult job. I mean, we cannot,
you know--a system--this isn't all just a system issue. Systems
are a really good part of that, but we also have to do--Tom
Bloom has been here. He is changing his culture, DFAS, quite a
bit, retraining people, making sure that people understand that
certain mistakes are unacceptable. He did a great job on
cleaning-up the canceled accounts issue. At one time there were
162 of those accounts that were illegal. He worked on that
problem and has completely cleaned-it-up, and I'll let him give
you the stats on it. But it is the sustained attention of
management and letting the people know that it's not
acceptable.
Mr. Horn. Mr. Bloom, want to comment on that?
Mr. Bloom. It's clearly a cultural issue, as Ms. Jonas
mentioned. It is also a human capital issue. We're working
those issues hard. We need to get the right folks with the
right training in the jobs as we're changing the culture, as
well as getting a handle on the systems, and we need to take
these issues as seriously as we have.
Ms. Jonas mentioned the canceled account issue that we
talked about last July--which, by the way, was one of the worst
days of my career to have to come up here and look you all in
the face and say, ``Look, we screwed up. We need to fix this.''
But we took that and we changed the systems. We got the
training for the people. We've worked very hard on the culture.
I can't tell you that we'll never have another one. I'd
like to think that we'll never have another one. But we have
worked so hard to change the culture and the systems and the
human capital. That's the kind of effort overall that needs to
be done.
Mr. Horn. I'd be curious about the Office of Personnel
Management and how helpful they are to a department, and what's
the kind of flexibility that you have to get that capital,
human capital? Are you able to do it within the Department of
Defense, or do you have to beg at the OPM?
I was in the Eisenhower administration, and our person in
administration who should have been working for the Department
never worked for him. He simply said, ``Gee, I've got to do
something with the U.S. Civil Service Commission.'' That was
just bunk, frankly, but they were so regulatory that they
weren't--they didn't have any vision of human capital. And we
puttered along with that until OPM was created, and I think the
ballots are still out on OPM, and they ought to be where they
can.
Looking at the various issues that you have faced and to
get them down at your level as an agency and not an all-
executive branch, then they ought to be letting everyone. I did
that in a rather complicated system in California, and the
personnel people just went after us. You couldn't believe it.
And it's because they don't have a broad vision. But, by
George, the trustees did. And it took me 5 years to do it, but
the fact is we had a flexible scale so that we could get the
people that we needed and we could go between 10,000 and
110,000 and have contracts every 6 months to see what are you
going to accomplish.
Mr. Kutz. Mr. Chairman, it's interesting right now. The
environment we're in with human capital in the financial area
is actually quite good. We've seen that, you know, with the
dotcom bomb and the people that are available out there looking
for a stable job, challenging work, the kind of work that we do
at GAO, for example, is quite appealing to people. We've had
pretty good success the last year in the financial management
area. In the past it was very difficult to compete with the
Pricewaterhouses and the other firms out there, but now even
they don't look so attractive with what's happening with Arthur
Andersen. So we've found that the environment right now is
quite good, actually, to hire good financial management people
from either the dotcom companies or right off of campuses, so
this is a unique opportunity to fill the ranks with some good
young people for succession planning and for, you know, places
like GAO and DOD for the future leaders of the financial
organizations.
Mr. Horn. I think when you're out in the States, and all 50
of them, that if you have a chance you ought to be talking to
students that are in business school, public administration
school, and undergrads as well as grad students and all that if
we are going to recruit people, because it is a terrific
opportunity.
Mr. Bloom. Mr. Chairman, over this last year we've really
seized on that opportunity with the economy, and every one of
my executives now, as part of their performance plan, is to
visit a college and university, get to know the professors, get
to know the kids, get to know the graduate students and
recruit. We look at this as a unique opportunity.
In the Department of Defense, particularly in financial
management, we had a 10-year hiatus essentially on hiring. It
is tough to find a 29-year-old in financial management in the
Department of Defense. We just hadn't been hiring them. And we
have a unique opportunity now, and at DFAS we are really
grasping.
Mr. Horn. Well, I'm delighted to hear that.
Mr. Lieberman. Mr. Chairman, could I add something on that?
Mr. Horn. Yes. Let me just get one point here on this. With
all that fine work, it might help if you sent Members of
Congress that want to be on campuses, want to say good things
about the Department of Defense, and so forth, I'd love to have
a kit which I can have some decent figures and know what's
happening now. The services have always been very good about
educating their people, and master's and Ph.D's and all the
rest of them.
Go ahead on that, Mr. Lieberman.
Mr. Lieberman. I can't tell you how much we appreciate your
interest in this question. The entire Civil Service faces a
crisis right now because it is an aging work force. In the
Office of the IG, we are in the process of hiring a lot of
young people, and I'm pleased to be able to tell you we've had
excellent luck over the last few years. I have some of our
junior auditors sitting here in the back row----
Mr. Horn. They're smiling.
Mr. Lieberman [continuing]. Thinking they were going to sit
in the shadows.
Mr. Horn. They're smiling and saying, ``We need a raise,''
right?
Mr. Lieberman. They are smiling. And they're excellent, and
we're very pleased that we've had good luck recruiting. Even
though we are not competitive salary-wise head-up with private
industry in a lot of cases, we can offer intrinsically
interesting work and good working conditions, and I think
anything that can be done to spread that word by public
officials would really be for the best.
Mr. Horn. See, that's the kind of thing, when Members of
Congress, Senate and House, have a weekly column in many
places, and that's one way to get it out to all the little
towns in America, as well as the big towns in America.
Well, let me pursue a few questions right now. Let me ask,
Mr. Kutz, the Department of Defense received approximately $100
million in fiscal year 2002 and has requested $96 million for
fiscal year 2003 to transform its financial management
operations. Over the years, the Department has undertaken
various efforts to streamline operations within the Department.
The success rate, however, has been less than admirable.
In your opinion, what does the Department of Defense need
to do to ensure that the current effort does not continue
wasting significant resources on marginal improvements, at
best? Have you separated out, as a critic, the degree to which
certain things should be done and certain things are being
done?
Mr. Kutz. I guess I would go back to the several items that
were mentioned earlier, the sustained leadership issue and the
cultural transformations needed to get this done.
The systems that you see up there I think are a symptom of
the lack of sustained leadership and of a culture that allows
or encourages even everybody to kind of do their own thing, to
build their own system, even if someone else has a system that
could do the same thing. That's how you get something like the
computer chip and the spider chart over there as to developing
systems.
So I really believe that the leadership and the culture--we
laid out in our written statement the seven key elements to
reform, but it seems to me that the culture is going to be the
most difficult one for the leadership here to really address
and to get people to change the way they're doing things.
I mean, if you look over time, people probably are hoping
they can wait this group out and maybe this phase will pass and
they can wait until the next group comes in, and that's the
reality of what not only DOD faces but other agencies face that
have difficulty having sustained leadership over time.
Mr. Horn. With Mr. Kutz, I'm going to have the ranking
person here, Ms. Schakowsky, for 10 minutes on going through
and seeing some of these things just like I have.
Ms. Schakowsky. Mr. Kutz, at every hearing we're told that
the solutions to these problems lie, when they get solved, 5 to
10 years down the road, but as we've seen from the purchase
card fiasco, what happens is the deck chairs get rearranged so
fast that it is hard to hold anybody really accountable 6
months later, so I'm wondering how we address that, and if you
believe, you really believe, that it is possible to solve these
problems, and if you want to make any predictions about that,
given the current promises, the current personnel, etc.
Mr. Kutz. Right. I mean, we're not in a position to predict
at this point. I think we would need to see several years of
looking over the long-term, this being, if you did it the right
way, a five, ten, possibly longer year type of solution until
there are specific markers set out there that we can see being
achieved year by year.
If you have another hearing next year and you see that they
have met their goal of having the enterprise architecture done,
developed, and in place and are moving on to step two, then I
think you can start to say, ``OK, we're seeing some progress
here.'' But until you really see the long-term plan and have
markers every year that they need to meet and they can come up
and testify before this subcommittee and others saying either
we did or didn't meet these markers, that's how you can start
projecting.
If you get 2 to 3 years into a seven-to 10-year planning,
you see that you are making progress, then you can start to
have some confidence that maybe this is going to take 7 years.
Ms. Schakowsky. And what happens if the marker isn't met,
you know, because that's what happens all the time.
Mr. Kutz. Exactly. I mean, right now there are no
consequences, necessarily, and that's why I think Secretary
Rumsfeld has said that there are going to be personal
consequences for people who are responsible, someone that you
can point to and say, ``You are the person who is actually
responsible.'' I think Ms. Jonas will probably elaborate on
that, but that is I think what is the new culture they're
trying to establish there, that someone actually is held
accountable if they don't meet that marker.
Ms. Schakowsky. And so that person gets fired and then
there's a new person and then we have a hearing, and that
person says, ``Well, I just got here and I have all these new
ideas and now here is what we're going to do.'' That's what I'm
talking about. We rearrange the deck chairs and we never get to
the end of it.
Ms. Jonas, did you want to comment?
Ms. Jonas. I can really appreciate your comments, but I
will tell you, from my own standpoint, Secretary Rumsfeld
really is the kind of Secretary who drags people in and says,
``What have you done for me lately? What has this system done
for me lately? Have you met your markers?'' That type of
leadership, you know, is filtering down. It's gradual.
If he decided to leave tomorrow, would the culture
continue? I don't know. But we need to continue to show that we
are accountable, that we intend on meeting deadlines, even
simple things like meeting deadlines from memos.
You know, the Department is used to just delaying
everything because there is no cost in their mind to delaying
everything. There's a huge cost to delaying things. You know,
you said in your discussion during my testimony that 10 years
have gone by, what's happened since the enactment of the law.
Well, nobody sees that there is a problem that we've delayed.
Some of the systems there represented we discovered were
costing us $3 to $4 billion. Nobody had made them visible. You
know, there's so much that needs to be done to bring this into
the light, let everybody see what is being spent, and make
people accountable, meet deadlines, meet milestones.
One of the reasons we went with a program management
technique, which is something that is used in the acquisition
side of the house, is because there is routine and regular
senior-level review at milestones. Those systems were never
developed with the acquisition discipline in mind, so nobody
has ever seen that they're being really developed. It is an
undisciplined process.
Ms. Schakowsky. Yes, it is an undisciplined process, that's
for sure, but it is not as if we didn't know, in many
instances, that a billion here, a billion there was being--it
was either unaccounted for or slipping through the cracks. So
it's not just shedding light. A lot of light has been shed over
the years.
Let me ask Mr. Lieberman a question. Maybe you've said this
in other ways. If you agree with the Department's new financial
management plans, and then if your office has been given
appropriate responsibilities in these plans, and, if not, if
you think that your office should have additional
responsibilities.
Mr. Lieberman. Yes, I do very much support the plan. We had
been calling for the exact same things that are in the plan now
for some time, and there had been movement in those directions,
but nothing put into place as concrete as what is going on now,
so we are very pleased with that.
Part of the scheme here, once the architecture is put
together and systems managers know exactly what it is they're
supposed to do, is that then we can begin auditing each one of
these system development efforts to provide independent
verification that they actually are making progress and doing
what they are supposed to be doing, rather than going off on a
tangent and creating kind of mushy result that has occurred in
prior years.
So we expect that to be a heavy audit requirement for us.
It is challenging in terms of resources and priorities because
people want us to do a lot of other things, too, but we're
going to step up to that as best we can and put very high
priority on it.
The Department also, I think, is very receptive to audit
support in other areas like credit cards. We're going to be
issuing a report next week on the purchase card program that
has lots of recommendations for changes in procedures in the
program, and I expect either total concurrence with that or
something close to it.
Ms. Schakowsky. I wanted to ask you, I think there is
another side to the whole purchase card issue than that has
been suggested, and that is the whole issue of vendor fraud,
where there is--anybody want to comment on that?
Mr. Kutz. I certainly can. That is an issue that we see. If
you have an environment--again, a weak control environment
where people are not reviewing the monthly credit card bill,
you are vulnerable to vendors peppering your account with
inappropriate charges, and we have several investigations that
we are going to followup on out in San Diego, based on the work
we did for the hearing last week, that we're going to look into
that issue. But yes, the Department is vulnerable to vendors
hitting their accounts for inappropriate charges or work that
wasn't done, and if nobody is looking at the bill the
Government is going to pay the bill and not receive the
services.
Ms. Schakowsky. I just can't emphasize enough how
absolutely unacceptable this would be to ordinary Americans
who--you know, Ms. Jonas, you talk about balancing a checkbook
as if that would be such a fabulous achievement for the
Department, which it would be, but families in this country do
it every single month, and it is unthinkable that they would
proceed year to year to year without doing that, and I think
there is this basic assumption that we are doing that here.
So these really modest goals I think, common-sense goals
that are regularly being violated is just--I'm speechless.
Thank you.
Mr. Horn. I've never seen a Member of Congress speechless.
[Laughter.]
But on a Wednesday afternoon--don't forget, we're not going
to be around tomorrow.
Anyhow, let's get back a little bit to Secretary Jonas. Is
there anything else you have to say to what Mr. Kutz has said
in terms of getting a comprehensive, integrated strategy for
reengineering all of the Department's business processes? What
actions have you taken or do you plan to take to ensure a
comprehensive, integrated approach to reform? And obviously
that's part of the culture and the toughest job is the culture,
and the only way you change that is you stay around there and
you don't run down the halls and say, ``How did I ever get into
this? I'm going back to Congress.''
If you're in there and they know you're in there for 5
years, it will change.
Ms. Jonas. I appreciate your comments, Mr. Chairman. I will
tell you I have been working about 14-hour days at least 6 days
a week on this job, so----
Mr. Horn. We're used to it up here.
Ms. Jonas [continuing]. I do wonder sometimes what did I
get myself into.
Mr. Horn. We're used to it up here.
Ms. Jonas. Just one comment to the point on vendor issues.
We are developing, as I mentioned in my testimony, and have
available to us some very detailed performance metrics that
we're using, and I alluded to the overpayments, which is a sore
issue, and using DCAA and Defense Audit Agency and DFAS
together, working very aggressively to look at some of these
contracts to identify overpayments--in other words, what are we
owed, and let's get it back, at a minimum, so that we're not
asking Congress for additional appropriations if we don't need
it. So let's get the money back from the contractors that is
owed us. Let's be out there, be aggressive.
I will be showing the SEC, which is the Senior Executive
Committee that the Secretary has, our metrics, so they'll see.
Their sustained leadership there will help.
I agree with much of what has been said here. I agree, Ms.
Schakowsky, with your statement it is incredible. What I have
found out since I have been over there has been truly
incredible. We just have to stick with it. It is a hard job.
It's going to get harder. We just must stay with it so that we
can demonstrate good stewardship.
The one good thing about working for Secretary Rumsfeld is
we know that we have his support.
Mr. Horn. The Secretary of Defense has stated it will take
8 years or more to complete the planned financial management
reform at the Department. Do you agree with that time table?
Ms. Jonas. It will take quite a while. What we do
anticipate is by 2004 being able to prototype this system, and
we would probably pick--I don't want to be too forward-
leaning--when we finish our architecture, that will tell us
very specifically what we should do and how we should proceed.
As Greg alluded to, it is the equivalent of a blueprint for
building a house. But I would say within various functional
areas, perhaps healthcare--I mean, healthcare is costing us $20
billion in the Department. That is a key area. It is one that
the Secretary is intensely interested in. We could get more
efficient in that area. We may prototype the system in that
area.
But we don't know for sure. It will take several years,
however.
Mr. Horn. Yes, because otherwise it will be 2009 and none
of you will be around. There will be a new administration,
since there is a term limit for Presidents at 8 years. A lot of
the bureaucrats say, ``Well, this crowd will go, just like the
last crowd,'' and so forth, so that's the cynical that you have
to really cut right through to it.
In your testimony you stated the Department of Defense has
created an enterprise architecture that is expected to be
complete in March, 2003, and you're saying you'd like to at
least get it at 2004. Anything else on that point?
Ms. Jonas. Just to clarify. The blueprint will be
accomplished within a year. We would be prototyping in 2004, so
that's a--there's a distinction there.
Mr. Horn. OK. What specifically controls does the
Department have in place to eliminate overpayments to
contractors? We passed a law on that, so what's happening?
Ms. Jonas. I think, as I alluded to, one of the things that
Dr. Zakheim did--and, Tom, you may want to pipe in here--was to
get the Defense Contract Audit Agency engaged in reviewing some
of these outstanding contracts and, you know, get aggressive on
that matter, and DFAS is cooperating with them--Tom, you might
want to address this--but really move out aggressively on these
overpayments.
Some of our--you know, these systems are very difficult to
reconcile. That causes problems in the contract process.
Contractors are anxious to get paid. We don't want to pay
interest. But at the same time we have to be just as aggressive
in getting what is owed to us as they are about getting the
money that is owed to them.
Mr. Bloom. And there is work being done on the back end, as
Ms. Jonas mentioned, but we are also doing a fair amount of
work on the front end to make sure we don't make the screw-ups
to begin with, and we've--I've got a cell of folks dedicated to
this. They're actually out in California. They work with a
system that we've developed called ``Predator,'' where we can--
before we make payments we take certain edit areas, certain
edit functions, and we have been able to capture an awful lot
of potential duplicate payments.
Most of the time we make a duplicate payment it is just
because of a mistake. Either a contractor has billed us twice
and we haven't caught that, or, you know, maybe we copied an
invoice twice, and Predator has gone a long way. We still have
a ways to go, but Predator has gone a long way to eliminate a
lot of those duplicate payments.
Mr. Horn. Now, one of the places we used to have--and I
haven't heard much about now--and I'd just be curious--
Columbus, Ohio, the facility there. On the Y2K bit we found
that $1 million went off to one, and he said, ``Hey, I didn't
have anything. Oh, well, must be right,'' so the person put it
in the bank, lived off the interest, and then sent it back. So
I don't think that's apocryphal. But what has happened in that
place--and it is clear that they were using GS-1s, for heaven's
sake, which I thought went out with the first World War, so
they didn't have the people there that could make judgments. So
what is happening?
Mr. Bloom. Columbus actually has been a success story in
the last year. We've changed leadership totally. I think you
had the opportunity last July to meet JoAnn Boutelle, and JoAnn
has done some great things there, along with three or four
other new members of the team, and she has changed the
attitude, she has changed the culture. She does not tolerate
mistakes. She is hard but fair, and she is working on getting
the people trained.
Again, I go back to the training. Ms. Boutelle is a big
proponent of----
Mr. Horn. Spell it out for us so she gets due credit in
this hearing.
Mr. Bloom. I believe it is B-O-U-T-E-L-L-E. And that's
JoAnn.
Mr. Horn. OK. Well, there ought to be awards for people
like that.
Mr. Bloom. We try to take as good care of her as we can,
sir.
Mr. Horn. OK. So do we have another question or so on Mr.
Lieberman, I think? Go ahead.
Ms. Schakowsky. Has anybody put a dollar figure to waste,
fraud, and abuse? We talked about a billion on purchase cards.
Has there ever been a total on that amount?
Mr. Lieberman. No. Well, we can tell you things like how
much money has been recovered from investigations, but if your
question is how much waste, fraud, and abuse is going on, we
don't know.
Ms. Schakowsky. Well, we estimated on the purchase cards in
terms of--oh, I see what you're saying, because that is what
has been discovered and recovered.
Mr. Lieberman. Right. And even the excellent GAO work at
those two Navy sites is fine in its own right, but there are
many different parts of the Department, so it remains to be
seen just how widespread the problem is.
Mr. Kutz. Well, as Mr. Lieberman said, you can quantify
what you know, but with fraud the issue is there's a lot of
fraud that we don't know about. Again, it gets back to the
control environment at DOD. The weaker the control environment,
the more fraud that's likely taking place that nobody ever
catches. A lot of the investigative cases that do get
prosecuted, as Mr. Lieberman said, some are caught through the
system and some are just caught because someone talks, but
there are as many or more that never get caught, so fraud is
always something that's very, very difficult to quantify.
Ms. Schakowsky. So in that context, though, then how does
someone self-confidently propose a $48 billion increase in a
budget where we know about billions of dollars of fraud that
has occurred--fraud, waste, and abuse that has occurred? I just
think the Department is on such weak footing to ask for such a
large increase. How do you? What do you say? If the American
people say, ``Wait a minute. Look at all this. Look at this
mess, this spider web.'' What's the answer to that? Anybody?
Ms. Jonas. I think one of the traditional means the
Department has used to understand what its request should be--
I'm a former budgeteer--has been what we spent in the prior
years, and I know that doesn't tell you what things actually
cost, it tells you what you've spent. And the difference
between the systems that we're proposing to create that give
true accountability, give cost accounting, give the Secretary
an understanding how efficient we are, they don't exist.
They're based on appropriations laws and appropriation
accounting, which basically tells you by quarter how much
you've obligated and----
Ms. Schakowsky. I understand that, but when we're asking
for an increase that, in and of itself, is larger than the
total defense budget of any other nation on the globe, then it
seems to me that, given the context in which this money is
used, that it's a pretty hard case to make, I think.
Mr. Horn. Any comments on that?
[No response.]
Mr. Horn. If not, this will be the last couple of
questions, although I'd like each of you to tell us something
that we were too dumb to ask you. We always give you an out.
In your testimony, Mr. Lieberman, you stated that the
fiscal year 2002 National Defense Authorization Act directs the
Inspector General to perform only the minimum audit procedures
required by auditing standards for year-end financial
statements that management acknowledges that they are
unreliable. The act also directs you to redirect resources
freed up by that limitation to more useful audits.
So the question is: What changes have you made to redirect
your audit resources from auditing statement balances to
identifying needed improvements in the Department's systems and
internal controls?
Mr. Lieberman. We had already cut back a lot of our
transaction testing on related year-end financial statements in
anticipation of that legislation, so we're not talking about a
massive shift in resources here.
In addition to that legislation, the Intelligence
Committees gave us extra financial statement audit work to do
vis-a-vis the Defense Intelligence Agencies, so some of those
resources are going sideways into that area.
But what that legislation helps us avoid doing is wasting
any audit resources telling everybody what they already know--
that these statements are unauditable. The thinking was if
management admits the statements are unauditable, there's no
point in the auditors having to prove that's so. We thoroughly
support that direction, which will help us focus our resources
toward looking at how these systems are doing rather than just
fooling around belaboring the obvious in terms of the problems
with the existing statements.
Mr. Horn. You heard about the Secretary of Defense that
certain things will take 8 or more years. Do you agree with
that time table, and does that mean we should not expect to see
an opinion on the Department's financial statements until 2009,
although Secretary Jonas has said there's a performance point
along the way?
Mr. Lieberman. Well, that entirely depends on how sweeping
a change the new architecture mandates, and then how much money
the Department and the Congress are going to be willing to
spend each year to implement that architecture. So I don't know
whether we're talking about a plan that is going to end up
being logically phased over 2 years, 5 years, 8 years. Any of
those things are possible, depending on how many resources you
throw at the problem.
All I can say is that history tells us that it's very
dangerous to make an optimistic estimate on this, because
systems development projects inevitably take quite a bit longer
than anybody forecasts upfront.
Mr. Horn. Now, do any of you have anything else you'd like
to get on the record?
Mr. Kutz. Mr. Chairman, I would say one thing. In the past
the Department had really focused its goals on getting a clean
opinion on the financial statements, and they've really kind of
gone away from that as the goal, because that's a misleading
goal. I mean, you can get a clean opinion and not have good
information to manage on a day-to-day basis. They are really--
their goal is more now to have good financial management
information to manage the organization.
As happens in the private sector, the goal is not a clean
opinion. The goal is to have real-time data on a day-to-day
basis to make decisions. That clean opinion falls out from
that. It just happens. It isn't something that each year
Johnson and Johnson and Exxon and Mobil are saying, ``What kind
of opinion are we going to get?'' It's, ``We close the books in
a day or two, we get the report to the shareholders, and we're
done.'' So I think that they've focused more on the longer-term
and actually real change rather than trying to take this mass
computer chip and the spider chart and trying to gin-up
financial statements from it.
DOD is so large that there is no way, I don't think, to go
through the heroic measures that would be necessary and it
would be a waste of taxpayer money to do so, so, I mean, I
would give them credit that they have got their priorities
straight and they've really scaled back on that and they're
trying to make longer-term, lasting changes.
Mr. Horn. Any other points anybody wants to make?
Ms. Jonas. Just to quantify what Greg has said, Mr.
Chairman, we spent--in 2001 the Department spent about $52
million to prepare and audit our financial statements, and,
based on new legislation that we got from the Congress last
year and pursuant to what Bob was talking about, this year we
will be able to save $24 million because we don't have to go
through the machinations. We really are interested in getting
at the root cause of the problem and not trying to act as if we
can come up with a clean audit that would be respectable. We
really want to get at the problem, get the good, timely
information to our decisionmakers so that they can become
efficient and we can--as Greg said, you know, clean statements
are just a product--an important product, but are not years
worth of and millions of dollars worth of work.
Mr. Horn. Well, thank you. All of you have contributed
quite a bit to our further understanding of what is the major
Department within the executive branch.
I now want to thank those that prepared this hearing: J.
Russell George, staff director and chief counsel; Bonnie Heald
is deputy staff director; Rosa Harris to my left and your right
is professional staff on detail from the General Accounting
Office; Earl Pierce, professional staff; our faithful clerk,
Justin Paulhamus; and the minority, Mr. Dave McMillen,
professional staff; Jean Gosa, minority clerk; and the court
reporter, Joan Trumps.
We now thank you all, and we have to go to vote.
[Whereupon, at 2:43 p.m., the subcommittee was adjourned,
to reconvene at the call of the Chair.]
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