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The Department of Defense (DOD) is responsible for more than half of the federal government’s discretionary spending. Significant financial and related business management systems and control weaknesses have adversely affected DOD’s ability to control costs; ensure basic accountability; anticipate future costs and claims on the budget; measure performance; maintain funds control; prevent and detect fraud, waste, and abuse; address pressing management issues; and prepare auditable financial statements. These issues led to GAO’s designating DOD financial management as high risk in 1995. DOD is one of the few federal entities that cannot accurately account for its spending or assets and is one of three major impediments that prevent GAO from rendering an opinion on the annual consolidated financial statements of the federal government. Without accurate, timely, and useful financial information, DOD is severely hampered in making sound decisions affecting its operations. Further, to the extent that current budget constraints and fiscal pressures continue, the reliability of DOD’s financial information and ability to maintain effective accountability for its resources will be increasingly important to the federal government’s ability to make sound resource allocation decisions. Effective financial management is also fundamental to achieving DOD’s broader business transformation goals.

Since the last high risk update in 2011, DOD’s senior-level commitment to improving the department’s financial management and achieving audit readiness has continued to be encouraging, with statements, testimony, and actions emphasizing the importance of effective financial management and audit readiness to DOD’s ability to effectively carry out its stewardship responsibilities over the substantial funding and other resources entrusted to the department.

DOD leadership directives, reinforced by congressional mandates, have set out a strategy and methodology for improving DOD’s financial management. DOD’s Financial Improvement and Audit Readiness (FIAR) Plan, which provides the strategy for DOD’s financial management reform efforts, has evolved since the plan was first issued in 2005. More specifically, in 2009, DOD changed its strategy to focus on two department-wide priorities: (1) strengthening processes, controls, and systems that produce budgetary information and support the department’s Statement of Budgetary Resources (SBR) and (2) improving the accuracy and reliability of management information pertaining to mission-critical assets, including military equipment and real property. Congress codified these priorities in the National Defense Authorization Act (NDAA) for fiscal year 2010, which also mandated September 30, 2017, as the date by which DOD is required to validate its financial statements as ready for audit. In 2011, the Secretary of Defense underscored the department’s first priority with a directive that set an accelerated interim date of September 30, 2014, for validation of one of DOD’s financial statements—its SBR—as audit ready. Congress required that DOD's FIAR Plan be adapted to support this goal in the NDAA for fiscal year 2012.

Implementation of the FIAR strategy department-wide is an ambitious undertaking that will require the commitment of resources and efforts at all levels, in all components, and across all DOD financial and business operations, such as those in the high-risk functional areas of contract management, supply chain management, support infrastructure management, and weapon systems acquisition. Because of the complexity and long-term nature of DOD’s financial management and business transformation efforts, GAO has reported that sustained and active involvement of the department’s Chief Management Officer (CMO), the Deputy CMO (DCMO), the military departments’ CMOs, the DOD Comptroller, and other senior leaders is critical.

Moreover, the results of GAO’s and the DOD Inspector General’s recent work have raised concerns about the ability of DOD components to effectively implement the department’s FIAR Plan. Effective, timely component-level actions are critical if the department is to achieve the plan’s objectives within the designated time lines. However, GAO’s review of the Navy’s Civilian Pay and Air Force’s Military Equipment audit readiness efforts identified significant deficiencies in the components’ execution of the FIAR Plan. Specifically, GAO found that the components were not following the FIAR methodology as set out in the FIAR Guidance—they conducted insufficient testing and reached conclusions that were not supported by testing results. GAO made 13 recommendations for improving development, implementation, documentation, and oversight of the Navy’s and Air Force’s improvement plans in accordance with the FIAR Guidance. DOD reported that it has corrective actions under way to address these recommendations.

GAO reviewed the Marine Corps’ efforts as DOD’s pilot military service for an SBR audit. The Marine Corps received a disclaimer of opinion from the DOD Inspector General on its fiscal years 2010 and 2011 SBRs because it could not provide needed supporting documentation in a timely manner, and the support that was provided for transactions was incomplete. The DOD Inspector General and GAO also reported that the Marine Corps did not have adequate processes, systems controls, and controls over accounting and reporting on the use of budgetary resources. The Marine Corps developed action plans in response to the DOD Inspector General’s findings, but GAO found that the plans focused on near-term outcomes and did not adequately specify key actions needed for long-term, sustainable readiness for a full audit. As a result of its difficulties in preparing for a full SBR audit, the Marine Corps altered its plans, beginning with fiscal year 2012, to narrow its focus to undergoing an audit of current-year budget activity and expenditures as an interim step toward achieving an audit of multiple-year budgetary activity and expenditures required for a full SBR audit. DOD officials have stated that they plan to revise the FIAR Guidance so that in preparing the SBR for audit, all components will begin with the current-year focus adopted by the Marine Corps as a building block for assuring that support for transactions can be identified and provided to auditors.

In its 2011 report on the Marine Corps’ effort, GAO recommended, among other corrective actions, that the Marine Corps use the results of its audit to develop a comprehensive, risk-based plan for designing and implementing corrective actions that provide sustainable solutions to address the recommendations from the SBR audit efforts. GAO also recommended that the secretaries of the military departments consider these lessons learned in their own financial improvement efforts. A key step in developing reliable financial statements, including the SBR, is the reconciliation of the components’ Fund Balance with Treasury (FBWT). GAO found that neither the Marine Corps nor the Navy had implemented effective processes for reconciling their Fund Balance with Treasury. GAO’s recommendations included development and implementation of standard operating procedures to guide the reconciliation process and training. DOD has reported that the Navy is coordinating with the Defense Finance and Accounting Service (DFAS) to develop guidance for its FBWT reconciliation process and related training.

In recent reviews of other DOD components, GAO also found internal control weaknesses in DOD’s procedures for maintaining accountability for billions of dollars in funds and other resources. For example, the Army and DFAS could not readily identify the full population of payroll accounts associated with the Army’s $46 billion active duty military payroll because of deficiencies in existing procedures and nonintegrated personnel and payroll systems. GAO recommended that the Army identify documents needed to support military payroll transactions affecting the pay of millions of active duty Army military personnel and that it develop and implement procedures for maintaining those documents. As a first step, the Army has developed a matrix of supporting documents for its military pay. However, the Army has not yet completed action to populate a central repository with these records. GAO also reported on deficiencies in the DFAS processes for detecting errors in active duty military payroll disbursements. In commenting on the report, DOD officials stated that DFAS plans to complete an assessment of the extent of errors by the end of February 2013 as a basis for determining any corrective actions.

GAO also reviewed DOD’s process for monitoring and reporting on its late-payment penalties under the Prompt Payment Act and the loss of early-payment discounts offered in contracts. GAO found that the process had significant flaws and omissions that resulted in incomplete and inaccurate data. Specifically, DOD’s performance measure for late-payment penalties did not consider about $54 billion of commercial payments from nine feeder systems, and DOD did not assess the data for accuracy or completeness. In addition, GAO found that DOD was not monitoring or reporting on discounts lost across the department. GAO recommended that DOD establish procedures for (1) assuring that the late-payment penalties data are properly compiled, (2) validating the accuracy and completeness of the data compiled and reported, and (3) monitoring discounts lost. In commenting on the report, DOD officials stated that they plan to implement corrective actions to address these recommendations.

GAO has also reported that substantive results are not yet apparent from DOD’s efforts to develop two important resources—modern business information systems and a skilled workforce—for resolving its financial management weaknesses and achieving and sustaining audit readiness. DOD has identified several, multifunctional Enterprise Resource Planning (ERP) systems as critical to its financial management improvement efforts. In a report on four of these ERPs, GAO found deficiencies in their capability to perform essential business functions in areas such as data quality, data conversion, system interfaces, and training. Further, DFAS personnel reported difficulty in using the systems to perform day-to-day activities. If these business systems do not provide the intended capabilities on schedule, DOD’s goal of establishing effective financial management operations and becoming audit ready could be jeopardized. GAO recommended that DOD ensure that (1) any future system deficiencies identified through independent assessments are resolved or mitigated prior to further deployment of the systems, (2) time lines are established and monitored for those issues identified by DFAS that are impacting their efficient and effective use, and (3) training on actual job processes are provided in a manner that allows users to understand how the new processes support their job responsibilities and the work they are expected to perform. GAO emphasized prioritization as an important part of an effective, risk-based process for addressing deficiencies. GAO also reported on continuing delays in DOD’s deployment of its key ERP systems, which are intended to replace existing outdated systems. In March 2012, GAO reported on the status of twelve ERP systems that DOD has identified as critical to ensuring that the department meets its mandated September 30, 2017, goal of full audit readiness. Specifically, GAO reported that schedules for five critical systems had been delayed from 2 to 4 years. As a result, two of the five systems are not to be fully deployed until fiscal year 2016 and two others not until the end of fiscal year 2017. GAO recommended that DOD follow best practices in cost and schedule management to allow better oversight for timely development, within cost, of systems that deliver the intended capabilities.

Regarding DOD’s financial management workforce, GAO reported that, as of September 2012, DOD had not met statutory requirements for assessing the gap between existing and future critical-skill needs. GAO recommended that DOD conduct competency analyses for mission-critical occupations, including the financial management workforce; develop guidance for strategic workforce planning; and improve its performance measures. As provided by the National Defense Authorization Act for Fiscal Year 2012 and in concert with a financial management workforce competency model, the DOD Comptroller is developing a financial management training and certification program. DOD told GAO that it expects to complete the certification program pilot in late March 2013 and that phased implementation is targeted for completion in March 2014.

Without a competent workforce to implement effective financial management processes, systems, and controls, DOD and its components are at risk of reporting unreliable data, which will impair the department’s ability to support well-informed management decision making. To the extent that such weaknesses are not addressed, DOD financial management will continue to be at high risk for waste, fraud, abuse, and mismanagement.

Congressional oversight committees have pressed for increased progress at DOD, through legislation and hearings in 2011 and 2012 in the Senate and House of Representatives, including those of the House Armed Services Committee Panel on Defense Financial Management and Auditability Reform, which conducted eight hearings as part of a 6-month review. GAO will continue to support Congress in its oversight.

Leadership. DOD will need to ensure the sustained involvement of leadership at all levels of the department in financial management and business transformation.

Audit readiness and accountability. DOD needs to take the following actions in working toward full financial statement auditability.

• The Navy and Air Force need to complete corrective actions in response to GAO’s recommendations for improving the development, implementation, documentation, and oversight of their improvement plans in accordance with the FIAR Guidance. Other DOD components also need to consider how these recommendations apply to their own efforts.
• The Marine Corps needs to apply the results of its SBR audit efforts to the development of a comprehensive, risk-based plan for designing and implementing corrective actions.
• The military departments should consider the Marine Corps’ lessons learned in conducting their own financial improvement efforts, and DOD needs to provide guidance on how the departments can fully leverage the lessons to facilitate their SBR and other audit readiness efforts.
• The Navy and DFAS need to adopt effective standard-operating procedures for reconciling the Navy’s and Marine Corps’ Fund Balance with Treasury—a fundamental step in preparing the SBR and other financial statements—to guide the reconciliation process and form the basis of a staff training curriculum.
• To achieve audit readiness for its military pay, the Army should develop a process for identifying the population of payroll transactions by fiscal year. In addition, the Army should establish procedures for identifying personnel and key finance documents needed to support the pay of military personnel. Further, DFAS needs to develop processes for detecting errors in active duty military payroll disbursements.
• DOD needs to improve its process for monitoring and reporting on late-payment penalties under the Prompt Payment Act and the loss of discounts offered when a contract or invoice allows an economically justified discount for early payment.

Business information systems. DOD needs to adopt best practices in cost estimation and scheduling to address cost, schedule, and capability issues and the resolution of identified deficiencies in the development and implementation of its ERPs. Also, DOD needs to establish procedures to help ensure that (1) any system deficiencies identified through independent assessments, including DOD Inspector General audits, are resolved or mitigated prior to further deployment of the systems, and (2) deficiencies are prioritized for correction on the basis of relative risk. DOD also needs to augment procedures and provide guidance to include specific time lines for tracking and monitoring the progress of corrective actions. Finally, DOD needs to establish training on how these systems capture and process data and information.

Workforce planning. DOD needs to fulfill the mandated critical-skill requirements for financial management workforce planning and improvement. In particular, DOD needs to conduct competency gap analyses of its current and expected future financial management workforce, develop guidance for strategic workforce planning, and improve its related performance measures.

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