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Report to Congressional Requesters: 

United States Government Accountability Office: 
GAO: 

May 2009: 

Financial Management: 

Achieving Financial Statement Auditability in the Department of 
Defense: 

GAO-09-373: 

Contents: 

Letter: 

Results in Brief: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Briefing Slides from the March 11, 2009, and March 27, 
2009, Briefing to the Senate Homeland Security and Governmental Affairs 
Staff: 

Appendix II: Comments from the Under Secretary of Defense 
(Comptroller): 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

May 6, 2009: 

Congressional Requesters: 

Since the first financial statement audit was attempted at a major 
Department of Defense (DOD) component over 20 years ago, GAO and DOD 
auditors have continued to report significant weaknesses in the 
department's ability to provide timely, reliable, consistent, and 
accurate information for management analysis, decision-making, and 
reporting. DOD has undertaken a number of initiatives over the years, 
such as the Financial Improvement Initiative in 2003, to improve the 
department's business operations, including financial management, and 
achieve clean financial statement audit opinions. However, these 
initiatives have met with limited success. In 2005, the DOD Comptroller 
established the DOD Financial Improvement and Audit Readiness (FIAR) 
Directorate[Footnote 1] to manage DOD-wide financial improvement 
efforts and to integrate those efforts with transformation activities, 
such as those outlined in the Enterprise Transition Plan,[Footnote 2] 
across the department. The components report accomplishments and 
progress against planned corrective actions to the FIAR Directorate for 
reporting in the FIAR Plan. 

You asked us to analyze the department's FIAR Plan to identify any 
areas where improvements are needed to enhance the plan's effectiveness 
as a management tool for guiding, monitoring, and reporting on the 
department's efforts to identify and resolve its financial management 
weaknesses and achieve financial statement auditability. On March 11, 
2009 and on March 27, 2009, we briefed your offices on the results of 
this work. This letter summarizes the information provided during the 
briefing and the attached briefing slides have been updated with 
additional information as of April 24, 2009. The full briefing, 
including our scope and methodology, can be found in appendix I. 

We performed our review from October 2008 through May 2009 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe the 
evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Results in Brief: 

In 2004, we reported that DOD lacked a comprehensive and integrated 
strategic plan with key milestones, measures/metrics, accountability 
mechanisms, or cost estimates for achieving financial statement 
auditability.[Footnote 3] According to best practices, a strategic plan 
should include the following key elements: 

* provide a comprehensive view of performance, including the 
establishment of a baseline of current operational functions, 
capabilities, and performance against which progress toward a defined 
goal or objective can be measured; 

* align goals and measures with departmentwide goals, and cascading 
goals and measures to lower organizational levels; 

* establish timelines and demonstrate results; 

* assign accountability for achieving results; and: 

* link resource needs to performance.[Footnote 4] 

While the FIAR Plan identifies three goals for improving DOD financial 
information and achieving audit readiness, it does not contain the key 
elements of a strategic plan that we have previously reported as 
necessary for successful DOD business transformation. During our review 
of DOD's September 2008 FIAR Plan, we identified the following areas 
that the department needs to address to improve the FIAR Plan as a 
strategic and management tool: 

* clear guidance is needed in developing and implementing improvement 
efforts; 

* no clear baseline exists against which incremental progress can be 
measured; 

* linkages between FIAR Plan goals and corrective actions and reported 
accomplishments are not always clear; 

* clear results-oriented metrics for measuring and reporting 
incremental progress are needed, and: 

* accountability is not clearly defined or assigned and resources 
budgeted and consumed are not identified. 

We also identified recent actions the department is taking to begin to 
address many of the issues we have identified above. 

Clear Guidance Is Needed in Developing and Implementing Improvement 
Efforts: 

Although DOD's September 2008 FIAR Plan emphasizes the importance of 
activities to identify and correct the department's financial 
management weaknesses and achieve financial statement auditability, 
further clarity is needed. We found that the FIAR Plan does not provide 
clear guidance to DOD components for developing consistent and 
compatible FIPs. For example, while the FIAR Plan provides examples of 
the types of activities that should occur within DOD components to 
identify financial management weaknesses, it is unclear which specific 
office or organization within an entity is accountable for performing 
these activities or tasks. This delineation of accountability is of 
particular importance in situations in which a policy, process and 
control, or system is controlled at the department level and is not 
within a component's control to change. Additionally, it is unclear 
what process or methodology a component should apply to identify and 
coordinate FIP efforts with those of other ongoing transformation 
efforts within the department or a component such as efforts to achieve 
total asset visibility.[Footnote 5] The lack of clear guidance in 
developing and implementing improvement efforts can result in premature 
or unjustified management assertions regarding the audit readiness of 
reported financial information based on inadequate and insufficient 
corrective actions taken in support of assertions. 

No Clear Baseline Exists against Which Incremental Progress Can Be 
Measured: 

The FIAR Plan does not establish a baseline of the department's 
financial management weaknesses and capabilities--such a baseline could 
be used to measure incremental progress toward achieving an estimated 
milestone date established for each component and the department. For 
example, the FIAR Plan does not identify or outline the department's 
and/or key components' current financial management weaknesses and 
capabilities in a manner that would facilitate, among other things, (1) 
a clear understanding of needed improvements in DOD's or a component's 
policies, processes and controls, systems and data, and human capital 
that are needed to address these weaknesses and achieve the FIAR Plan's 
goals; (2) identification of gaps in planned corrective actions; and 
(3) establishment of a realistically attainable date, by component and 
at the department level, for achieving financial statement 
auditability. The lack of a clear baseline has an adverse impact on the 
ability of DOD management and other oversight bodies, such as Office of 
Management and Budget (OMB) and the Congress, to understand the status 
of improvement efforts and what additional actions are needed. 

Linkages between FIAR Plan Goals and Corrective Actions and Reported 
Accomplishments Are Not Always Clear: 

The FIAR Plan does not establish linkages between its goals and the 
corrective actions and accomplishments reported in the plan. 
Specifically, it does not clearly define how corrective actions or 
accomplishments identified in the plan contribute individually or 
collectively within a component or at the department level to address a 
defined weakness, provide a financial management capability, or achieve 
a FIAR goal. Without better integration of FIAR Plan goals and 
corrective actions and reported accomplishments, it will be difficult 
for DOD management and other oversight bodies to clearly assess the 
sufficiency of corrective actions and reported accomplishments in 
addressing the department's financial management weaknesses and 
achieving financial statement auditability. 

Clear Results-Oriented Metrics for Measuring and Reporting Incremental 
Progress Are Needed: 

The FIAR Plan does not utilize clear results-oriented metrics to 
measure and report corrective actions and accomplishments in a manner 
that clearly demonstrates how they contribute individually or 
collectively to addressing a defined weakness, providing a certain 
capability, or achieving a FIAR goal by an estimated milestone date 
established for each component and the department. For example, many of 
the corrective actions in the September 2008 FIAR Plan update were 
reported as 100 percent complete. However, the FIAR Plan provides no 
description as to how these completed actions contributed individually 
or collectively to addressing a specific weakness, providing a 
capability, or achieving a FIAR goal, including what, if any, 
corrective actions remain. The lack of results-oriented performance 
measures undermines the department's ability to effectively monitor, 
measure, and report progress and hold responsible individuals, offices, 
or organizations accountable. 

Accountability Is Not Clearly Defined or Assigned and Resources 
Budgeted and Consumed Are Not Identified: 

The National Defense Authorization Act for Fiscal Year 2008[Footnote 6] 
established the DOD Chief Management Officer (CMO) and the military 
service CMO positions responsible for efficient and effective business 
operations within DOD, including the development of a strategic 
management plan covering those operations and procedures to monitor its 
progress. Although the FIAR Plan and component FIPs are intended to 
improve the effectiveness and efficiency of DOD's financial management 
operations, the FIAR Plan does not identify and describe the oversight 
roles and responsibilities of DOD's CMO and military service CMOs will 
have over the financial improvement efforts occurring within the 
department. The recent establishment of a CMO within the department and 
its military services was intended to help foster transformation of the 
department's business operations, including financial management, 
through an integrated approach. The integration of the CMO into the 
FIAR Plan's efforts to transform the department's financial management 
operations is of particular importance given the need for sustained and 
focused leadership. Since its establishment in 2005, the FIAR 
Directorate has been led by five different directors. By not defining 
the roles and responsibilities of the CMO in achieving the FIAR Plan 
goals, the department's financial community may not have the executive 
leadership and authority needed to achieve transformation in related 
business operations, such as acquisition and logistics, which impact 
financial management but are not within the operational control of the 
department's financial management community. 

Additionally, the FIAR Plan also does not assign accountability for 
achieving results to specific offices or organizations within the 
department, such as the Property and Equipment Policy Office within the 
Office of the Under Secretary of Defense for Acquisition, Technology, 
and Logistics and/or at lower levels within a DOD component, such as 
the Deputy Chief of Staff for Logistics, Installations, and Mission 
Support within the Air Force. Further, the FIAR Plan does not identify 
and report on the resources budgeted and utilized to achieve a specific 
corrective action, incremental result, capability, or a FIAR Plan goal. 
Without formally assigning accountability for results to specific 
offices and organizations within the department and understanding the 
cost of improvement efforts, DOD lacks assurance that sufficient and 
sustainable corrective actions will be taken to address its financial 
management weaknesses in the most cost-effective manner. 

Recent FIAR Directorate Actions: 

The Acting FIAR Director acknowledged that the FIAR Plan does not yet 
provide the department with a strategic plan or approach, including a 
sequence of key activities and their dependencies, for addressing DOD's 
financial management weaknesses and achieving financial statement 
auditability. To its credit, the FIAR Directorate is currently in the 
process of making improvements to the FIAR Plan and component FIPs that 
it believes will collectively begin to address many of the issues we 
have identified above. However, the Acting FIAR Director stated that 
this will be a long-term effort and its effects on the FIAR Plan will 
be gradual. According to the Acting FIAR Director, the goals of these 
recent actions are to (1) elevate the level of understanding within the 
department and its components of the actions needed to identify and 
address financial management weaknesses, and achieve and sustain 
financial statement auditability; (2) improve standardization and 
completeness of FIP activities in identifying and addressing financial 
management weaknesses; (3) aid in defining the sequence of key 
activities and their dependencies at the component level, so that the 
critical path for achieving financial statement auditability can also 
be defined at the department level; and (4) enhance the FIAR 
Directorate's ability to guide, monitor, and report on improvement 
efforts and incremental progress. 

Conclusions: 

The FIAR Plan is intended to provide DOD components with a strategic 
plan for addressing the department's financial management weaknesses 
and achieving clean financial statement audit opinions. Additionally, 
the FIAR Plan is intended to provide DOD management, OMB, and the 
Congress with an overview of the department's financial management 
improvement efforts and incremental progress toward addressing DOD's 
financial management weaknesses and achieving financial statement 
auditability by estimated milestone dates established for each 
component and the department. As acknowledged by the department, the 
FIAR Plan does not yet provide the department or its components with 
clear and consistent guidance for implementing, measuring, and 
sustaining corrective actions, and reporting incremental progress 
toward achieving the FIAR Plan's goals. Additionally, specificity is 
needed in the FIAR Plan regarding guidance, metrics, linkage of 
corrective actions and accomplishments to goals, accountability, 
resources, and governance to enhance the ability of the FIAR 
Directorate to guide, monitor, and report on the department's efforts 
to address its financial management weaknesses and achieve financial 
statement auditability. 

To its credit, the FIAR Directorate has initiated actions, consistent 
with several of our recommendations, to improve the FIAR Plan through 
its efforts to (1) standardize component-level FIPs and (2) identify 
and address gaps in corrective actions planned at the component level 
and improve progress reporting. However, this will be a long-term 
effort and its effects on the FIAR Plan will be gradual. These actions 
are an important step toward enhancing the FIAR Plan as a strategic and 
management tool for improving oversight of corrective actions and the 
FIAR Directorate's ability to report on incremental progress to DOD 
management, OMB, and the Congress. Because the component FIPs provide 
the detailed steps that feed into the FIAR Plan, it is critical for the 
FIAR Directorate to have effective management oversight and monitoring 
and to ensure reliable reporting of the components' financial 
management improvement efforts. Given the importance of financial 
management to the department's business operations, the DOD and 
military service CMOs should have defined roles and responsibilities in 
overseeing and monitoring financial management improvement efforts. 

Recommendations for Executive Action: 

To increase the FIAR Plan's effectiveness as a strategic and management 
tool for guiding, monitoring, and reporting on financial management 
improvement efforts and increasing the likelihood of meeting the 
department's goal of financial statement auditability, we recommend 
that the Secretary of Defense direct the DOD CMO to ensure that the 
military service CMOs and the DOD Comptroller's Acting FIAR Director 
work jointly, as appropriate, to take the following six actions: 

1. Issue guidance to standardize the development of the FIPs, including 
their format and frequency, to aid in ensuring the: 

* sufficiency of corrective actions through the identification of 
performance gaps in corrective actions planned within and between 
components; 

* sharing of successful methodologies developed and implemented to 
address a financial management weakness or achieve a defined 
capability; and: 

* reliability of progress reporting, including clear linkages and 
descriptions of how the corrective action, individually or collectively 
contributes to achievement of a defined capability or goal by an 
estimated milestone date established for each component and the 
department. 

2. Establish a baseline of financial management capabilities and 
weaknesses at the component level, and ultimately at the department 
level, that can be used to: 

* obtain a clear understanding of needed improvements in DOD's or a 
component's policies, processes and controls, systems and data, and 
human capital that are needed to address these weaknesses and support 
relevant management assertions (i.e., existence or occurrence, 
completeness, valuation, rights and obligations, and presentation and 
disclosure) regarding the reliability of reported financial 
information; 

* identify gaps in planned corrective actions; and: 

* establish a realistically attainable date, by component and at the 
department level, for achieving financial statement auditability. 

3. Establish clear results-oriented metrics within the FIAR Plan and 
component FIPs for measuring and reporting quantifiable incremental 
results toward achieving defined financial management capabilities, 
addressing a specific weakness, and/or achieving FIAR Plan goals by an 
estimated milestone date established for each component and the 
department. 

4. Describe in the FIAR Plan the oversight roles and responsibilities, 
if any, of the DOD CMO and military service CMOs over FIAR Plan and FIP 
improvement efforts, as appropriate. 

5. Assign accountability in the FIAR Plan for achieving results to 
specific offices or organizations: 

* within the department, such as the Property and Equipment Policy 
Office within the Office of the Under Secretary of Defense 
(Acquisition, Technology, and Logistics); and/or: 

* at lower levels within a DOD component, such as the Deputy Chief of 
Staff for Logistics, Installations, and Mission Support within the Air 
Force. 

6. Provide visibility to DOD management and the Congress, within each 
FIAR Plan update, of resources budgeted and spent to address a specific 
weakness or achieve specific incremental improvements in the 
department's financial management capabilities. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Secretary of Defense and 
received written comments from the Under Secretary of Defense 
(Comptroller), which are reprinted in appendix II. Overall, DOD 
concurred with our recommendations and identified specific actions that 
are either completed, underway, or planned. 

DOD acknowledged the importance of properly allocating and utilizing 
resources to address financial management weaknesses. The department 
indicated that it has modified the component level financial 
improvement plans to begin collecting resource information, but 
indicated that it may be cost prohibitive to identify and track 
resources related to addressing specific weaknesses. Given the finite 
resources available for financial management improvement, we believe 
that it is incumbent upon the department to identify and use cost 
information where practical in authorizing and prioritizing corrective 
actions to ensure that the department's limited business transformation 
resources are targeted at those actions that will result in long-term 
sustained financial management improvements. 

We are sending copies of this report to the subcommittee. We are also 
sending copies of this report to the Secretary of Defense, the Deputy 
Secretary of Defense/Chief Management Officer, the Under Secretary of 
Defense (Comptroller)/Chief Financial Officer, the Under Secretary of 
the Army/Chief Management Officer, the Under Secretary of the Navy/ 
Chief Management Officer, the Under Secretary of the Air Force/Chief 
Management Officer, and OMB's Office of Federal Financial Management. 
This report is available at no charge on GAO's Web site at [hyperlink, 
http://www.gao.gov]. Should you or your staff have any questions 
concerning this report, please contact me at (202) 512-9095 or 
khana@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. Key contributors to this report were Evelyn Logue, Assistant 
Director; Darby Smith, Assistant Director; F. Abe Dymond, Assistant 
General Counsel; Richard Cambosos; Jamie Haynes; and Lauren Catchpole. 

Signed by: 

Asif A. Khan: 
Director: 
Financial Management and Assurance: 

List of Congressional Requesters: 

The Honorable Thomas R. Carper: 
Chairman: 
The Honorable John McCain: 
Acting Ranking Member: 
Subcommittee on Federal Financial Management, Government Information, 
Federal Services, and International Security: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable George V. Voinovich: 
Acting Ranking Member: 
Subcommittee on Oversight of Government Management, the Federal 
Workforce, and the District of Columbia: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Tom Coburn, M.D.
United States Senate: 

[End of section] 

Appendix I: Briefing Slides from the March 11, 2009, and March 27, 
2009, Briefing to the Senate Homeland Security and Governmental Affairs 
Staff: 

Financial Management: Achieving Financial Statement Auditability in the 
Department of Defense: 

Briefing to Congressional Requesters: 

March 11, 2009, and March 27, 2009 [Updated April 24, 2009]: 

Briefing Agenda: 
* Introduction; 
* Objective; 
* Summary of Findings; 
* Background; 
* Findings; 
* Conclusions; 
* Recommendations; 
* Agency Comments and Our Evaluation: 
* Scope and Methodology. 

Introduction: 

Since the first financial statement audit was attempted at a major 
Department of Defense (DOD) component over 20 years ago, GAO and DOD 
auditors have continued to report significant weaknesses in DODís 
ability to provide timely, reliable, consistent, and accurate 
information for management analysis, decision-making, and reporting. 

DOD has undertaken a number of initiatives over the years, such as the 
Financial Improvement Initiative in 2003, to improve the departmentís 
business operations, including financial management, and achieve clean 
financial statement audit opinions. However, these initiatives have met 
with limited success. 

In 2005, the DOD Comptroller established the DOD Financial Improvement 
and Audit Readiness (FIAR) Directorate to manage DOD-wide financial 
improvement efforts and to integrate those efforts with transformation 
activities, such as those outlined in the departmentís Enterprise 
Transition Plan, across the department. DOD considers the Enterprise 
Transition Plan its department-wide plan for business transformation. 

The FIAR Directorate is responsible for preparing the FIAR Plan to 
comply with provisions in the National Defense Authorization Act 
(NDAA)for Fiscal Year 2002 and subsequent provisions in the 
Authorization Acts for fiscal years 2006 and 2007. 

The FIAR Plan is the departmentís strategic plan and management tool 
for guiding, monitoring, and reporting on the departmentís financial 
management improvement efforts and communicating incremental progress 
in addressing its financial management weaknesses and achieving 
financial statement auditability. The plan is updated and provided to 
DOD management, the Office of Management and Budget (OMB), and the 
Congress twice a year. 

The plan has three main goals: (1) provide timely, reliable, accurate, 
and relevant financial information; (2) sustain improvements through an 
effective internal control program;[Footnote 7] and (3) achieve 
unqualified (clean) audit opinions on DODís financial statements. 

To achieve its goals, the FIAR Plan utilizes a bottom-up approach in 
which DOD components are responsible for developing and implementing 
component-level financial improvement plans (FIP) to identify and 
address their financial management weaknesses through sustained 
improvements and achieve financial statement auditability. The 
components report accomplishments and progress against planned 
corrective actions to the FIAR Directorate for reporting in the FIAR 
Plan. 

[End of section] 

Objective: 

The Chairman, Acting Ranking Member, and Former Ranking Member on 
Federal Financial Management, Government Information, Federal Services, 
and International Security, and the Acting Ranking Member, Subcommittee 
on Oversight of Government Management, the Federal Workforce and the 
District of Columbia, Senate Committee on Homeland Security and 
Governmental Affairs, requested GAO analyze the departmentís FIAR Plan 
to identify any areas where improvements are needed to enhance the planí
s effectiveness as a management tool for guiding, monitoring, and 
reporting on the departmentís efforts to identify and resolve its 
financial management weaknesses and achieve financial statement 
auditability. 

Our audit scope and methodology are presented at the end of this 
briefing. 

[End of section] 

Summary of Findings: 

The FIAR Plan identifies three main goals for improving DOD financial 
information and achieving audit readiness. However, as a strategic plan 
for addressing DODís financial management weaknesses and achieving 
financial statement auditability, we found that the FIAR Plan does not: 

* provide clear guidance to DOD components for developing and 
implementing improvement efforts; 

* establish a baseline of the department's financial management 
weaknesses and capabilities against which incremental progress toward 
achieving an estimated milestone date established for each component 
and the department can be measured; 

* establish linkages between FIAR Plan goals and the corrective actions 
and accomplishments reported in the plan; 

* utilize clear results-oriented metrics to measure and report 
corrective actions and accomplishments in a manner that clearly 
demonstrates how they contribute, individually or collectively, toward 
addressing a defined weakness, providing a certain capability, or 
achieving a FIAR goal by an estimated milestone date established for 
each component and the department; 

* describe the oversight roles and responsibilities of the DOD Chief 
Management Officer (CMO) and military service CMOs over the FIAR Plan 
and FIP improvement efforts, as appropriate; 

* assign accountability for achieving results to specific offices or 
organizations within: 
- the department, such as the Property and Equipment Policy Office with 
the Under Secretary of Defense for Acquisition, Technology, and 
Logistics and/or; 
- at lower levels within a DOD component, such as the Deputy Chief of 
Staff for Logistics, Installations, and Mission Support within the Air 
Force; and; 

* identify and report on the resources budgeted and utilized to achieve 
a specific corrective action, incremental result, capability, or FIAR 
Plan goal. 

The Acting FIAR Director acknowledged that the FIAR Plan does not yet 
provide the department with a strategic plan or approach, including a 
sequence of key activities and their dependencies, for addressing DODís 
financial management weaknesses and achieving financial statement 
auditability. 

To its credit, the FIAR Directorate is currently in the process of 
making improvements to the FIAR Plan and component FIPs that it 
believes will collectively begin to address many of the issues we have 
identified above. However, the Acting FIAR Director stated that this 
will be a long-term effort and its effect on the FIAR Plan will be 
gradual. According to the Acting FIAR Director, the FIAR Directorateís 
objective is to: 

* improve standardization and completeness of FIP activities in 
identifying and addressing financial management weaknesses; 

* aid in defining the sequence of key activities and their dependencies 
at the component level, so that the critical path for achieving 
financial statement auditability can also be defined at the department 
level; and; 

* enhance the FIAR Directorateís ability to guide, monitor, and report 
on improvement efforts and incremental progress. 

[End of section] 

Background: 

DODís financial management and related business operations and systems 
problems are pervasive, complex, long-standing, and challenging to 
resolve. 

The nature and severity of DODís financial management problems 
adversely affect the departmentís ability to: 

* control costs, ensure basic accountability over its tangible assets 
and other resources, anticipate future costs and claims on the budget, 
measure performance, maintain funds control, prevent fraud, and address 
pressing management issues, including supporting the warfighters and 
their families; and; 

* obtain clean financial statement audit opinions. 

To draw attention to the need to address these weaknesses, GAO 
designated DOD financial management and business systems modernization 
(a key element to successful financial management transformation) as 
high-risk areas in 1995. DODís approach to business transformation was 
added to the high-risk list in 2005. These areas remain on GAOís high-
risk list today.[Footnote 8] 

In 2003, DOD began the Financial Improvement Initiative (the departmentí
s predecessor to its FIAR effort) with the goal of achieving a DOD-wide 
unqualified (clean) audit opinion on its fiscal year 2007 financial 
statements. 

In 2004, we reported that DODís Financial Improvement Initiative lacked 
a clear and realistic plan to make its 2007 unqualified audit opinion 
goal a reality.[Footnote 9] Key issues identified included: 

* the absence of a comprehensive, integrated plan or strategy with key 
milestones, measures/metrics, accountability mechanisms, or cost 
estimates; 

* limited linkage between component efforts and ongoing business 
transformation efforts, such as the departmentís Enterprise Transition 
Plan; and; 

* the absence of management oversight/monitoring structures and 
processes to ensure component efforts resulted in sustained progress. 

Key Legislation: 

Various statutes[Footnote 10] require the department to: 

* improve its financial management systems, processes, and controls to 
ensure that complete, reliable, consistent, and timely information is 
prepared and responsive to the financial information needs of agency 
management and oversight bodies, and; 

* prepare and issue audited financial statements. 

Key LegislationóFiscal Year 2002 NDAA, Section 1008: 

Section 1008 of the NDAA for Fiscal Year 2002 requires DOD to minimize 
resources to develop, compile, report, and audit unreliable financial 
statements. 

Section 1008 also states that when DOD is able to certify to the DOD 
Inspector General (IG) that a financial statement for a fiscal year is 
reliable, DOD may expend resources to develop, compile, report, and 
audit the statement and the statements of subsequent fiscal years. 

Pursuant to the requirements in section 1008 of the NDAA for Fiscal 
Year 2002, DOD has asserted in its annual report for the last 7 years 
that the department is unable to provide adequate evidence supporting 
material amounts in its financial statements. 

Section 1008 of the Fiscal Year 2002 NDAA also requires DOD to submit 
an annual report[Footnote 11] to defense committees, OMB, the 
Department of the Treasury (Treasury), GAO, and the DOD IG: 

(1) concluding on whether DOD policies, procedures, and systems support 
financial statement reliability, and the expected reliability of each 
DOD financial statement; and; 

(2) summarizing specific sections of the annual financial management 
plan (the FIAR Plan) that: 

(a) detail the priorities, milestones, and measures of success that 
apply to the preparation of the financial statements, 

(b) detail the planned improvements in process that are to be 
implemented within 12 months after the date of the report, and, 

(c) provide an estimate of when each financial statement will convey 
reliable information. 

Key LegislationóFiscal Year 2006 NDAA, Section 376: 

Section 376 of the NDAA for Fiscal Year 2006: 

* Limited DODís authority to obligate or expend any funds for the 
purpose of any financial improvement activity related to the 
preparation, processing, or audit of financial statements until the 
Secretary submits to congressional defense committees a comprehensive 
and integrated financial management improvement plan (the FIAR Plan) 
that: 

- describes specific actions to be taken to correct financial 
management deficiencies that impair the ability of the DOD to prepare 
timely, reliable, and complete financial information; and; 

- systematically ties such actions to process and control improvements 
and business system modernization efforts described in the business 
enterprise architecture[Footnote 12] and enterprise transition plan 
required by 10 U.S.C. ß 2222. 

Further, section 376 requires that the Secretary of Defense provide a 
written determination that each of the financial management improvement 
activities undertaken is: 

* consistent with the financial improvement plan submitted; and; 

* likely to improve internal controls or otherwise result in sustained 
improvements in the ability of the department to produce timely, 
reliable, and complete financial management information. 

Exception: The limitation regarding the authority to obligate or expend 
funds does not apply to activities directed at assessing the adequacy 
of internal controls and remediating any inadequacy identified pursuant 
to such an assessment. 

DOD has provided FIAR Plan updates to the defense committees and OMB to 
comply with the requirements of these and subsequent NDAA provisions. 

[End of section] 

Findings: 

Clear Guidance Is Needed in Developing and Implementing Improvement 
Efforts: 

Although DODís September 2008 FIAR Plan emphasizes the importance of 
activities to identify and correct the departmentís financial 
management weaknesses and achieve financial statement auditability, 
improved clarity is needed to ensure that management assertions 
regarding the reliability of reported financial information are 
adequately supported. 

We found that the FIAR Plan does not provide clear guidance to the DOD 
components for developing and implementing consistent and compatible 
FIPs. For example, while the FIAR Plan provides examples of the types 
of activities that should occur within DOD components to identify 
financial management weaknesses, it is unclear: 

* which specific office or organization within an entity is accountable 
for performing these activities or tasks, particularly in situations 
where a policy, process and control, or system that should be examined 
is controlled at the department level and is not within a componentís 
control to change, and; 

* what process or methodology a component should apply to identify and 
coordinate FIP efforts with those of other on-going transformation 
efforts within the department or a component such as efforts to achieve 
total asset visibility.[Footnote 13] 

Moreover, our interviews with FIAR Directorate and military service FIP 
personnel found that the department and its components lack a clear and 
consistent understanding of how: 

* key elements, such as policies, processes and controls, systems and 
data, and human capital of a componentís financial management 
operations should be assessed to identify weaknesses,[Footnote 14] and; 

* these key elements contribute individually and/or collectively in 
providing the audit evidence needed to support management assertions 
(including existence or occurrence, completeness, valuation, rights and 
obligations, and presentation and disclosure) regarding the reliability 
of financial information. 

Based upon our review of the FIAR Plan, it appears that clearer 
guidance is needed to aid both component and department-level personnel 
in ensuring the adequacy and sufficiency of corrective actions taken in 
supporting management assertions regarding reported financial 
information. 

Various FIAR Plan updates have reported that certain component line 
items have achieved audit readiness and were approved for audit by 
component management and the FIAR Directorate. However, subsequent 
efforts to validate managementís assertions indicated that approval was 
not warranted and audit readiness would not be achieved until a much 
later time. 

According to the Acting FIAR Director, the department is increasing its 
role in assessing the adequacy of a componentís basis for asserting 
audit readiness prior to approving resources to validate a componentís 
audit readiness. 

For example, in its June and September 2006 FIAR Plans, the FIAR 
Directorate reported the following accomplishment: ďAir Force had 
corrected its financial deficiencies for Fund Balance with Treasury 
(General Fund) and has been approved for audit.Ē 

However, it was subsequently determined that the Air Force did not 
fully consider all the associated requirements for asserting to the 
reliability of its Fund Balance with Treasury (General Fund) line item. 
According to the Acting FIAR Director, the Air Force has developed a 
plan to begin addressing these weaknesses. In the departmentís 
September 2008 FIAR Plan, DOD reported that Air Forceís Fund Balance 
with Treasury account will not achieve audit readiness until 2013. 

Additionally, the June 2007 FIAR Plan reported that DODís ďmilitary 
equipment baseline valuations were correct, that all military equipment 
that should be capitalized has been valued, and that DOD owns and has 
rights to all capitalized military equipment.Ē This assertion was made 
despite several sources of information, including an internal 
verification and validation study[Footnote 15] and DOD auditor reports, 
[Footnote 16] which contradicted the basis for this assertion, 
including the departmentís ability to sustain its baseline valuation. 

Efforts are currently under way at the component level to address the 
shortcomings in the departmentís initial efforts to establish and 
sustain a military equipment valuation baseline. 

Current estimates in the September 2008 FIAR Plan state that 
auditability of military equipment will be achieved in 2014 for the 
Army and the Navy and in 2016 for the Air Force. 

No Clear Baseline Exists against Which Incremental Progress Can Be 
Measured: 

The FIAR Plan does not establish a baseline of the departmentís and/or 
key componentsí current financial management weaknesses and 
capabilities in a manner that would facilitate: 

* a clear understanding of needed improvements in DODís or a 
componentís policies, processes and controls, systems and data, and 
human capital that are needed to address these weaknesses and achieve 
the FIAR Planís goals; 

* identification of gaps in planned corrective actions; and; 

* establishment of a realistically attainable date, by component and at 
the department level, for achieving financial statement auditability. 

Congressional and OMB staff have expressed frustration with the FIAR 
planís lack of a baseline from which to assess incremental progress. 

Linkages between FIAR Plan Goals and Corrective Actions and Reported 
Accomplishments Are Not Always Clear: 

The FIAR Plan does not establish linkages between its goals and the 
corrective actions and accomplishments reported in the plan. 
Specifically, it does not clearly define how corrective actions or 
accomplishments identified in the plan contribute individually or 
collectively within a component or at the department level to 
addressing a defined weakness, providing a financial management 
capability, or achieving a FIAR goal. The lack of clear linkage makes 
it difficult to clearly assess the sufficiency of corrective actions 
and reported accomplishments in addressing DODís financial management 
weaknesses and achieving financial statement auditability. 

* For example, the September 2008 FIAR Plan identifies a number of 
accomplishments related to its efforts to improve visibility into 
Global War on Terror (GWOT) funds appropriated, payments made, and 
remaining funds available. 

* However, the plan provides no discussion as to whether and how its 
efforts to improve GWOT funds accountability contribute in a broader 
sense to improved funds control DOD-wide and incremental progress 
toward achieving financial statement auditability. 

Clear Results-Oriented Metrics for Measuring and Reporting Incremental 
Progress Are Needed: 

The FIAR Plan does not utilize clear results-oriented metrics to 
measure and report corrective actions and accomplishments in a manner 
that clearly demonstrates how they contribute individually or 
collectively to addressing a defined weakness, providing a certain 
capability, or achieving a FIAR goal by an estimated milestone date 
established for each component and the department.Furthermore, the FIAR 
Plan does not identify task dependenciesókey to identifying corrective 
actions/tasks that must be finished on schedule if the planned result, 
capability, or goal is to be achieved as planned. For example, the 
September 2008 FIAR Plan update reported or identified: 

* that DOD would complete its efforts to establish an interface between 
the departmentís item unique identification (IUID) registry and its 
military equipment accountability system to automate updates for Navy 
small craft by December 31, 2008, but provided no measure of 
incremental progress toward achieving this milestone; 

* that by March 31, 2010, the Air Force would complete the corrective 
action related to military equipment ďAchieve Defense Enterprise 
Accounting and Management System-DEAMS-initial operational capability,Ē
[Footnote 17] but reported no progress toward achieving this goal, even 
though the Air Force initiated its effort to acquire DEAMS in August 
2003; 

* no dependency relationship among any of the corrective actions 
identified for the department or any of its components. For example: 

- the relationship between componentsí efforts to identify the universe 
of units, facilities, property, and/or operations that may have 
environmental liabilities and their corrective actions planned to 
document that all property, plant, and equipment records have been 
reviewed and the liabilities properly recorded is unclear; and; 

- the Air Force Audit Agency had completed a review of capital lease 
reporting, but the component did not identify whether or how the audit 
results affected its planned corrective actions. 

Many of the corrective actions in the September 2008 FIAR Plan update 
were reported as 100 percent complete. However, the FIAR Plan provides 
no description as to how these completed actions contributed 
individually or collectively toward addressing a specific weakness, 
providing a capability, or achieving a FIAR goal by an estimated 
milestone date established for each component and the department and 
what corrective actions remain. 

The lack of clear, results-oriented performance measures undermines the 
departmentís ability to effectively monitor, measure, and report 
progress or hold responsible individuals, offices, or organizations 
accountable for results. 

Roles and Responsibilities of the CMOs Are Not Defined: 

The NDAA for Fiscal Year 2008 established the DOD CMO and military 
service CMO positions responsible for efficient and effective business 
operations within DOD, including the development of a strategic 
management plan covering those operations and procedures to monitor its 
progress.[Footnote 18] 

Although the FIAR Plan and component FIPs are intended to improve the 
effectiveness and efficiency of DODís financial management operations, 
the FIAR Plan does not identify or describe the roles and 
responsibilities: 

* the CMO will have in overseeing and monitoring the FIAR Plan and DODí
s financial improvement efforts. This is particularly important given 
the need for sustained and focused leadership. Since its establishment 
in 2005, the FIAR Directorate has been led by five different directors; 

* the military service CMOs will have in overseeing and monitoring 
their componentsí financial improvement efforts. 

The recent establishment of a CMO within the department and its 
military services was intended to help foster transformation of the 
departmentís business operations, including financial management 
through an integrated approach. 

By not defining the roles and responsibilities of the CMO in achieving 
financial management transformation, the department may not have the 
executive leadership and authority needed to influence transformation 
in related business operations, such as acquisition and logistics, that 
impact financial management, but are not within the operational control 
of the departmentís financial management community. 

Accountability Is Not Assigned to Specific Offices or Organizations: 

The FIAR Plan does not assign accountability for achieving results to 
specific offices or organizations within: 

* the department, such as the Property and Equipment Policy Office 
within the Office of the Under Secretary of Defense for Acquisition, 
Technology, and Logistics, and/or; 

* at lower levels within a DOD component, such as the Deputy Chief of 
Staff for Logistics, Installations, and Mission Support within the Air 
Force. 

Without formally assigning accountability for results, DOD lacks 
assurance that sufficient and sustainable corrective actions will be 
taken to address its financial management weaknesses and achieve 
financial statement auditability. 

Resources Budgeted and Consumed Are Not Identified: 

The FIAR Plan does not identify at the department level and/or at the 
component level, as appropriate, the resources budgeted and consumed to 
achieve a specific corrective action, financial management capability, 
or FIAR Plan goals. 

As a result, DOD lacks assurance that resources utilized for corrective 
actions are directed in the most efficient and cost effective manner. 

Recent FIAR Directorate Actions: 

The Acting FIAR Director acknowledged that the FIAR Plan does not yet 
provide the department with a strategic plan or approach, including a 
sequence of key activities and their dependencies, for addressing DODís 
financial management weaknesses and achieving financial statement 
auditability. To its credit, the FIAR Directorate is currently in the 
process of making improvements to the FIAR Plan and component FIPs that 
it believes will collectively begin to address many of the issues we 
have identified above. However, the Acting FIAR Director stated that 
this will be a long-term effort and its effects on the FIAR Plan will 
be gradual. 

According to the Acting FIAR Director, the goals of these recent 
actions are to: 

elevate the level of understanding within the department and its 
components of the actions needed to identify and address financial 
management weaknesses, and achieve and sustain financial statement 
auditability; 

* improve standardization and completeness of FIP activities in 
identifying and addressing financial management weaknesses; 

* aid in defining the sequence of key activities and their dependencies 
at the component level, so the critical path for achieving financial 
statement auditability can also be defined at the department level; 
and; 

* enhance the FIAR Directorateís ability to guide, monitor, and report 
on improvement efforts and incremental progress. 

To improve its strategic approach, the FIAR Directorate is in the 
process of: 

1. developing and mandating the use of a standard FIP template to aid 
in: 

* providing greater comparability of corrective actions/approaches 
planned among components for addressing similar issues to ensure 
completeness of corrective actions; 

* ensuring that weaknesses within the departmentís policies, processes 
and controls, and systems and data, are identified and addressed in a 
manner, which provides management with a greater level of assurance 
that the conditions that may cause an account balance to be misstatedó
missing entries, erroneous entries, or that are incorrectly presented 
and described in the financial statementsóare addressed; 

* identifying specific results/progress toward addressing deficiencies 
and achieving financial statement auditability; 

* identifying the sequence of key activities and their dependencies for 
achieving financial statement auditability at the component level, 
which is needed to determine the critical path at the department level 
and ultimately, when component and departmentwide financial statements 
are likely to be auditable; and; 

* assigning accountability and identifying resource needs for achieving 
corrective actions. 

2. establishing a task force of personnel from the military services, 
the FIAR Directorate, and the DOD IG (as an independent observer/ 
advisor) to begin reviewing component approaches directed at 
identifying and correcting financial management weaknesses and 
achieving auditability. 

* DOD intends to focus its efforts initially on the Armyís FIP efforts 
related to fund balance with Treasury and the Navyís FIP efforts 
related to real property to identify weaknesses and gaps in their 
current approaches. 

* The components will be required to prepare and implement corrective 
action plans and update their FIPs to remediate weaknesses identified 
by the task force. 

* The task force expects to complete these initial reviews by September 
2009. 

* According to the Acting FIAR Director, DOD hopes to use these task 
force reviews to (1) identify and share areas where the FIP approach 
can be improved and (2) develop a methodology that can be applied to 
future reviews of other component financial management improvement 
areas. 

[End of section] 

Conclusions: 

The FIAR Plan is intended to provide DOD components with a strategic 
plan for addressing the departmentís financial management weaknesses 
and achieving clean financial statement audit opinions. Additionally, 
the FIAR Plan is intended to provide DOD management, OMB, and the 
Congress with an overview of the departmentís financial management 
improvement efforts and the incremental progress these efforts are 
making toward addressing DODís financial management weaknesses and 
achieving financial statement auditability by estimated milestone dates 
established for each component and the department. 

As acknowledged by the department, the FIAR Plan does not yet provide 
the department or its components with clear and consistent guidance for 
implementing, measuring, and sustaining corrective actions and 
reporting incremental progress toward achieving the FIAR Planís goals. 

Additional specificity is needed in the FIAR Plan regarding guidance, 
metrics, linkage of corrective actions and accomplishments to goals, 
accountability, resources, and governance to enhance the ability of the 
FIAR Directorate to guide, monitor, and report on the departmentís 
efforts to address its financial management weaknesses and achieve 
financial statement auditability. 

To its credit, the FIAR Directorate has initiated actions, consistent 
with several of our recommendations, to improve the FIAR Plan through 
its efforts to (1) standardize component level FIPs and (2) identify 
and address gaps in corrective actions planned at the component level 
and improve progress reporting. However, this will be a long-term 
effort and its effects on the FIAR Plan will be gradual. 

These actions are an important step toward enhancing the FIAR Plan as a 
strategic and management tool for improving oversight of corrective 
actions and the FIAR Directorateís ability to report on incremental 
progress to DOD management, OMB, and the Congress. 

Because the component FIPs provide the detailed steps that feed into 
the FIAR Plan, it is critical for the FIAR Directorate to have 
effective management oversight and monitoring and to ensure reliable 
reporting of the componentsí financial management improvement efforts. 

Given the importance of financial management to the departmentís 
business operations, the department and military service CMOs should 
have defined roles and responsibilities in overseeing and monitoring 
financial management improvement efforts. 

[End of section] 

Recommendations for Executive Action: 

To increase the FIAR Planís effectiveness as a strategic and management 
tool for guiding, monitoring, and reporting financial management 
improvement efforts and increasing the likelihood of meeting the 
departmentís goal of financial statement auditability, we recommend 
that the Secretary of Defense direct the DOD CMO to ensure that the 
military service CMOs and the DOD Comptrollerís Acting FIAR Director 
work jointly, as appropriate, to take the following six actions: 

1. Issue guidance to standardize the development of the FIPs, including 
their format and frequency, to aid in ensuring the: 

* sufficiency of corrective actions through the identification of 
performance gaps in corrective actions planned within and between 
components; 

* sharing of successful methodologies developed and implemented to 
address a financial management weakness or achieve a defined 
capability; and; 

* reliability of progress reporting, including clear linkages and 
descriptions of how the corrective action, individually or 
collectively, contributes to the achievement of a defined capability or 
goal by an estimated milestone date established for each component and 
the department. 

2. Establish a baseline of financial management capabilities and 
weaknesses at the component level, and ultimately at the department 
level, that can be used to: 

* obtain a clear understanding of needed improvements in DODís or a 
componentís policies, processes and controls, systems and data, and 
human capital that are needed to address these weaknesses and support 
relevant management assertions (i.e., existence or occurrence, 
completeness, valuation, rights and obligations, and presentation and 
disclosure) regarding the reliability of reported financial 
information; 

* identify gaps in planned corrective actions; and; 

* establish a realistically attainable date, by component and at the 
department level, for achieving financial statement auditability. 

3. Establish clear results-oriented metrics within the FIAR Plan and 
component FIPs for measuring and reporting quantifiable incremental 
results toward achieving defined financial management capabilities, 
addressing a specific weakness, and/or achieving FIAR Plan goals by an 
estimated milestone date established for each component and the 
department. 

4. Describe in the FIAR Plan the oversight roles and responsibilities, 
if any, of the DOD CMO and military service CMOs over FIAR Plan and FIP 
improvement efforts, as appropriate. 

5. Assign accountability in the FIAR Plan for achieving results to 
specific offices or organizations: 

* within the department, such as the Property and Equipment Policy 
Office within the Office of the Under Secretary of Defense for 
Acquisition, Technology, and Logistics; and/or; 

* at lower levels within a DOD component, such as the Deputy Chief of 
Staff for Logistics, Installations, and Mission Support within the Air 
Force. 

6. Provide visibility to DOD management, OMB, and the Congress, within 
each FIAR Plan update, of resources budgeted and spent to address a 
specific weaknesses or achieve specific incremental improvements in the 
departmentís financial management capabilities. 

[End of section] 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Secretary of Defense and 
received written comments from the Under Secretary of Defense 
(Comptroller), which are reprinted in appendix II. Overall, DOD 
concurred with our recommendations and identified specific actions that 
are either completed, underway, or planned. 

DOD acknowledged the importance of properly allocating and utilizing 
resources to address financial management weaknesses. The department 
indicated that it has modified the component level financial 
improvement plans to begin collecting resource information, but 
indicated that it may be cost prohibitive to identify and track 
resources related to addressing specific weaknesses. 

Given the finite resources available for financial management 
improvement, we believe that it is incumbent upon the department to 
identify and use cost information where practical in authorizing and 
prioritizing corrective actions to ensure that the departmentís limited 
business transformation resources are targeted at those actions that 
will result in long-term sustained financial management improvements. 

[End of section] 

Scope and Methodology: 

We reviewed the DOD FIAR Plans for December 2005 through September 2008 
and the FIPs used to prepare the March and September 2008 FIAR updates 
to obtain an understanding of the: 

* process the department has outlined for its components to follow in 
identifying and correcting their financial management weaknesses and 
supporting the departmentís efforts to achieve and sustain financial 
statement auditability; 

* reported financial management accomplishments; 

* metrics utilized within the plan to assess and report incremental 
progress; 

* changes, if any, to the departmentís financial management improvement 
and audit readiness strategy; and; 

* FIAR Directorateís oversight and monitoring of the FIAR Plan, 
including reported accomplishments and incremental progress. 

To further our understanding of the FIAR Plan and FIPs, we obtained 
briefings and conducted interviews with key personnel responsible for 
these plans within the Office of the Under Secretary of Defense 
(Comptroller), the FIAR Directorate and the Financial Management and 
Comptroller Offices of the Army, the Navy, and the Air Force. 

We obtained briefings from FIAR Directorate personnel regarding the 
FIAR Web-based planning tool and reviewed extracts from the tool to 
further our understanding of the departmentís measures/metrics, 
monitoring, and reporting process. 

To assess the adequacy of DODís FIAR Plan in providing DOD components 
with a strategy for addressing the departmentís financial management 
weaknesses and achieving financial statement auditability, we utilized 
criteria that identified the key elements of a strategic plan as 
identified by our previous work[Footnote 19] and as stipulated by the 
Government Performance and Results Act of 1993. These elements include: 

* providing a comprehensive view of performance, including the 
establishment of a baseline of current operational functions, 
capabilities, and performance against which progress toward a defined 
goal or objective can be measured; 

* aligning of goals and measures with departmentwide goals and 
cascading goals and measures to lower organizational levels; 

* establishing timelines and demonstrating results; 

* assigning of accountability for achieving results; and; 

* linking resource needs to performance. 

Given the importance of ensuring the sufficiency of corrective actions 
and accomplishments in achieving the FIAR Plan goals, we considered the 
financial statement assertions as criteria in assessing the adequacy of 
the FIAR Plan as a strategic and management tool for guiding, 
monitoring, and reporting incremental progress toward identifying and 
addressing financial management weaknesses and achieving auditability. 

* Assertions are representations by management regarding the 
reliability of reported financial information. These assertions 
include: existence or occurrence, completeness, rights and obligations, 
valuation or allocation, and presentation and disclosure.[Footnote 20] 

* Most of the auditorsí work in forming an opinion on financial 
statements consists of obtaining and evaluating sufficient appropriate 
evidence concerning managementís assertions in the financial 
statements. 

We performed our review from October 2008 through May 2009 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings based on our audit objectives. We believe the evidence 
obtained provides a reasonable basis for the our findings and 
conclusions based on our audit objectives. 

[End of section] 

[End of appendix] 

Appendix II: Comments from the Under Secretary of Defense 
(Comptroller): 

Under Secretary Of Defense: 
Comptroller: 
1100 Defense Pentagon: 
Washington, DC 20301-1100: 

April 21, 2009: 

Mr. Asif A. Khan: 
Director, Financial Management and Assurance: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Mr. Khan: 

This is the Department of Defense (DoD) response to the GAO draft 
report GAO-09-373, "Financial Management: Achieving Financial Statement 
Auditability in the Department of Defense" (GAO code 197081). 

The Department is encouraged that the draft report cites the work that 
the Financial Improvement and Audit Readiness (FIAR) Directorate has 
completed to improve the FIAR Plan and the underlying efforts of the 
Department to achieve its financial improvement objectives. As with any 
effort the size and scope of the Department's financial management 
improvement efforts, continuous evaluation and evolution of the 
strategy and approach is warranted. The FIAR Directorate and the 
financial management leadership in the Military Services and Defense 
Agencies remain devoted to achieving the goals of the FIAR Plan in the 
most efficient manner possible. 

The financial management of the Department is the responsibility of the 
Chief Financial Officer (CFO) acting on behalf of the Secretary of 
Defense. As in any organization the CFO collaborates with and is 
dependent on operational organizations to implement and operate 
effective internal controls to achieve reliable financial management. 
The Chief Management Officer (CMO) of the Department and the CMOs of 
the Military Services are critical to the Department's success by 
facilitating the prioritization of financial management improvement 
efforts across the functional areas of the Department. 

I agree in principle with the recommendations in your draft report so 
long as responsibility for improvement remains with the CFO. Consistent 
with that view, and as stated in your report and our detailed responses 
attached, the FIAR Directorate in my office is already implementing 
solutions to address them. We value the feedback of the GAO received 
during the review and in this draft report. We look forward to 
continued collaboration to ensure that our efforts are as effective as 
possible. 

The Department appreciates the opportunity to comment on the draft 
report. My point of contact for this effort is Ms. Radha Sekar. She can 
be reached at 703-697-3200 or by email at radha.sekar@osd.mil. 

Sincerely, 

Signed by: 

Robert F. Hale: 

Attachment: As stated: 

[End of letter] 

GAO Draft Report Dated March 18, 2009: 
GAO-09-373 (GAO CODE 197081): 

"Financial Management: Achieving Financial Statement Auditability In 
The Department Of Defense" 

Department Of Defense Comments To The GAO Recommendations: 

Recommendation 1: The GAO recommends that the Secretary of Defense 
direct the DoD Chief Management Officer (CMO) to ensure that the 
military service CMOs and the DoD Comptroller's Acting Financial 
Improvement and Audit Readiness (FIAR) Director work jointly, as 
appropriate, to issue guidance to standardize the development of the 
financial improvement plans (FIP), including their format and 
frequency. (Page 7/GAO Draft Report) 

DOD Response: Concur. The Under Secretary of Defense (Comptroller)/ 
Chief Financial Officer (USD(C)) will retain overall responsibility for 
statement audibility and ensure the Military Services Financial 
Improvement Plan Program Management Offices and Military Service CMOs 
collaborate with the FIAR Directorate on implementing standard FIPs. 
The FIAR Directorate began the effort to establish standard RP plan 
content and format in the last quarter of fiscal year 2008. The 
guidance for standard FIP format and content was delivered to the 
Components on December 18, 2008. The Components' FIPs were updated to 
comply with the new guidance as of February 28, 2009. The FIAR 
Directorate continues to work with the Components to improve the 
content of their FIPs and achieve standard formats, contents and 
outcomes within the Components' FIPs. 

Recommendation 2: The GAO recommends that the Secretary of Defense 
direct the DoD Chief Management Officer (CMO) to ensure that the 
military service CMOs and the DoD Comptroller's Acting Financial 
Improvement and Audit Readiness (FIAR) Director work jointly, as 
appropriate, to establish a baseline of financial management 
capabilities and weaknesses at the component level, and ultimately at 
the department level. (Page 7/GAO Draft Report) 

DOD Response: Concur. The USD(C) will ensure the FIAR Directorate works 
directly with the Military Service Financial Improvement Plan Program 
Management Offices to establish capability baselines related to 
financial controls and to ensure that the military services make 
appropriate progress in achieving the objectives and capabilities. 

The FIAR Directorate has already begun collaborating with the Military 
Services Financial Improvement Plan Program Management Offices to 
establish a set of control objectives and capabilities that are 
critical to achieving improved financial management and audit 
readiness. These objectives and capabilities have been integrated into 
the Component FIPs to serve as the outcomes against which progress will 
be measured. 

Recommendation 3: The GAO recommends that the Secretary of Defense 
direct the DoD Chief Management Officer (CMO) to ensure that the 
military service CMOs and the DoD Comptroller's Acting Financial 
Improvement and Audit Readiness (FIAR) Director work jointly, as 
appropriate, to establish clear results-oriented metrics within the 
FIAR Plan and components FIPS for measuring and reporting quantifiable 
incremental results toward achieving defined financial management 
capabilities, addressing a specific weakness, and/or achieving FIAR 
Plan goals by an estimated milestone date established for each 
component and the department. (Page 7/GAO Draft Report) 

DOD Response: Concur. The USD(C) will ensure the Military Service CMOs, 
the Military Service Financial Improvement Plan Program Management 
Offices, and the FIAR Directorate will collaborate to establish and 
implement outcome based performance metrics to measure progress toward 
financial management improvement and auditability. 

As stated in the response to recommendation 2, the FIAR Directorate has 
already begun collaboration with the Military Services to establish 
objectives and define the capabilities needed to achieve financial 
management improvement and audit readiness. These objectives and 
capabilities will serve as the outcome-oriented metrics and milestones 
to measure incremental and meaningful progress towards the ultimate 
goals. 

Recommendation 4: The GAO recommends that the Secretary of Defense 
direct the DoD Chief Management Officer (CMO) to ensure that the 
military service CMOs and the DoD Comptroller's Acting Financial 
Improvement and Audit Readiness (FIAR) Director work jointly, as 
appropriate, to describe in the FIAR Plan the oversight roles and 
responsibilities, if any, of the DoD CMO and the military service CMOs 
over FIAR Plan and FIP improvement efforts as appropriate. (Page 7/GAO 
Draft Report) 

DOD Response: Concur. The USD(C) will be responsible for implementing 
this option. 

Recommendation 5: The GAO recommends that the Secretary of Defense 
direct the DoD Chief Management Officer (CMO) to ensure that the 
military service CMOs and the DoD Comptroller's Acting Financial 
Improvement and Audit Readiness (FIAR) Director work jointly, as 
appropriate, to assign accountability in the FIAR Plan for achieving 
results to specific offices or organizations. (Page 7/GAO Draft Report) 

DOD Response: Concur. The FIAR Plan already is the responsibility of 
the Secretary of each Military Service and the Director of the Defense 
Agencies as they formally coordinate on the FIAR Plan as prepared by 
their assigned offices in collaboration with the FIAR Directorate. The 
USD(C) as the chief financial officer holds the responsibility for 
achieving auditable financial statements for the Department. The USD(C) 
will work with the Military Service financial communities and CMOs and 
Directors of the Defense Agencies and FIAR Directorate on assigning 
accountability for FIAR progress to the appropriate offices and 
organizations below the CMO level in the Military Services and Defense 
Agencies. In order to accommodate this, the FIAR Directorate has added 
a requirement to the FIPs to identify the specific offices and 
organizations responsible for achieving each control objective and 
capability. 

Recommendation 6: The GAO recommends that the Secretary of Defense 
direct the DoD Chief Management Officer (CMO) to ensure that the 
military service CMOs and the DoD Comptroller's Acting Financial 
Improvement and Audit Readiness (FIAR) Director work jointly, as 
appropriate, to provide visibility to DoD management and the Congress, 
within each FIAR Plan update, of resources budgeted and spent to 
address a specific weakness or achieve specific incremental 
improvements in the department's financial management capabilities. 
(Page 8/GAO Draft Report) 

DOD Response: Partially concur. The USD(C) will ensure the Military 
Service CMOs and Military Service Financial Improvement Plan Program 
Management Offices collaborate with the FIAR Directorate to provide 
visibility of the resources needed and used for FIAR efforts. The 
Department recognizes that it is important to properly allocate 
resources to the FIAR effort and to ensure that once allocated those 
resources are effective. The HP plans have been modified to collect 
this information; however, the cost and effort of assigning and 
tracking resources to address specific weaknesses may be prohibitive. 

[End of appendix] 

Footnotes: 

[1] The FIAR Directorate is responsible for preparing the FIAR Plan to 
comply with provisions in the National Defense Authorization Act for 
Fiscal Year 2002 and subsequent provisions in the Authorization Acts 
for fiscal years 2006 and 2007. 

[2] DOD considers the Enterprise Transition Plan its department-wide 
plan for business transformation. 

[3] GAO, Financial Management: Further Actions Are Needed to Establish 
Framework to Guide Audit Opinion and Business Management Improvement 
Efforts at DOD, [hyperlink, http://www.gao.gov/products/GAO-04-910R] 
(Washington, D.C.: Sept. 20, 2004). 

[4] See GAO, Defense Business Transformation: Achieving Success 
Requires a Chief Management Officer to Provide Focus and Sustained 
Leadership, [hyperlink, http://www.gao.gov/products/GAO-07-1072] 
(Washington, D.C.: Sept. 5, 2007); and as stipulated by the Government 
Performance and Results Act of 1993. 

[5] DOD defines total asset visibility as the capability to provide 
timely and accurate information on the location, movement, status or 
condition, and identify of units, personnel, equipment, and supplies 
DOD-wide and having the capability to act on that information. 

[6] Pub. L. No. 110-181, ß904, 122 Stat. 3, 273 (Jan. 28, 2008). 

[7] In its annual financial report for fiscal year 2008, DOD reported 
that it intends to leverage its FIAR Plan to implement the internal 
control assessment and corrective actions required under OMB Circular 
No. A-123, Managementís Responsibility for Internal Control, Appendix 
A, Internal Control Over Financial Reporting. 

[8] GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-09-271] (Washington, D.C.: January 
2009). 

[9] GAO, Financial Management: Further Actions Are Needed to Establish 
Framework to Guide Audit Opinion and Business Management Improvement 
Efforts at DOD, [hyperlink, http://www.gao.gov/products/GAO-04-910R] 
(Washington, D.C.: Sept. 20, 2004). 

[10] These statutes include the Chief Financial Officers Act, the 
Government Management Reform Act of 1994, the Federal Financial 
Management Improvement Act of 1996, and various annual authorization 
and appropriations act provisions. 

[11] The Annual Report on Reliability. 

[12] An enterprise architecture is a modernization blueprint of an 
organization or a functional or mission area that together with an 
enterprise transition plan, provides a road map for moving between the 
current state of operations to the intended state. 

[13] DOD defines total asset visibility as the capability to provide 
timely and accurate information on the location, movement, status or 
condition, and identity of units, personnel, equipment, and supplies 
DOD-wide and having the capability to act on that information. 

[14] OMB Circular No. A-123, section IV and appendix A requires DOD to 
assess these key elements and to provide guidance on how to identify 
and assess weaknesses. 

[15] Department of Defense, Property and Equipment Policy, Office of 
the Undersecretary of Defense for Acquisition, Technology, and 
Logistics, Internal Validation and Verification Project: Military 
Equipment Valuation(June 13, 2006). 

[16] Department of Defense Inspector General, Financial Management: 
Report on Development of the DOD Baseline for Military Equipment,D-2005-
114 (Arlington, VA: Sept. 30, 2005); and Financial Management: Report 
on the Review of the Development of the DOD Baseline for Military 
Equipment, D-2005-112 (Arlington, VA: Sept. 30, 2005); Air Force Audit 
Agency, Air Force Military Equipment Baseline Valuation, F2007-0009-
FB3000 (May 29, 2007); and Military Equipment BaselineĖElectronic Pods, 
F2007-0003-FB3000 (Jan. 19, 2007). 

[17] Initial operational capability is achieved when a system is 
implemented with some minimal capabilities and additional capabilities 
are planned before the system is determined to be fully operational. 

[18] Pub. L. No. 110-181, ß904, 122 Stat. 3, 273 (Jan. 28, 2008). 

[19] See GAO, Defense Business Transformation: Achieving Success 
Requires a Chief Management Officer to Provide Focus and Sustained 
Leadership, [hyperlink, http://www.gao.gov/products/GAO-07-1072] 
(Washington, D.C.: Sept. 5, 2007). 

[20] The American Institute of Certified Public Accountantsí Statement 
on Audit Standards No. 106: Audit Evidence, and the GAO/Presidentís 
Council on Integrity and Efficiency Financial Audit Manual. 

[End of section] 

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