[House Hearing, 106 Congress] [From the U.S. Government Publishing Office] RESULTS OF THE DEPARTMENT OF DEFENSE'S FISCAL YEAR 1999 FINANCIAL STATEMENTS AUDIT ======================================================================= HEARING before the SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTH CONGRESS SECOND SESSION __________ MAY 9, 2000 __________ Serial No. 106-200 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.gpo.gov/congress/house http://www.house.gov/reform ______ U.S. GOVERNMENT PRINTING OFFICE 70-660 DTP WASHINGTON : 2001 _______________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California CONSTANCE A. MORELLA, Maryland TOM LANTOS, California CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania JOHN L. MICA, Florida PATSY T. MINK, Hawaii THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington, MARK E. SOUDER, Indiana DC JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio Carolina ROD R. BLAGOJEVICH, Illinois BOB BARR, Georgia DANNY K. DAVIS, Illinois DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts ASA HUTCHINSON, Arkansas JIM TURNER, Texas LEE TERRY, Nebraska THOMAS H. ALLEN, Maine JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois DOUG OSE, California ------ PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont HELEN CHENOWETH-HAGE, Idaho (Independent) DAVID VITTER, Louisiana Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director David A. Kass, Deputy Counsel and Parliamentarian Lisa Smith Arafune, Chief Clerk Phil Schiliro, Minority Staff Director ------ Subcommittee on Government Management, Information, and Technology STEPHEN HORN, California, Chairman JUDY BIGGERT, Illinois JIM TURNER, Texas THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania GREG WALDEN, Oregon MAJOR R. OWENS, New York DOUG OSE, California PATSY T. MINK, Hawaii PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California J. Russell George, Staff Director and Chief Counsel Louise DiBenedetto, Professional Staff Member Bryan Sisk, Clerk Trey Henderson, Minority Counsel C O N T E N T S ---------- Page Hearing held on May 9, 2000...................................... 1 Statement of: Coburn, General John G., Commanding General, U.S. Army Materiel Command; General Lester L. Lyles, Commander, Air Force Materiel Command; and Vice Admiral James F. Amerault, Deputy Chief of Naval Operations........................... 117 Lieberman, Robert J., Assistant Inspector General for Auditing, Department of Defense............................ 3 Lynn, William J., Under Secretary of Defense (Comptroller), Chief Financial Officer, Department of Defense, accompanied by Nelson E. Toye, Deputy Chief Financial Officer.......... 83 Steinhoff, Jeffrey C., Acting Assistant Comptroller General, Accounting and Information Management Division, U.S. General Accounting Office, accompanied by Lisa G. Jacobson, Director, Defense Audits; and David R. Warren, Director, Defense Management Issues.................................. 26 Letters, statements, etc., submitted for the record by: Amerault, Vice Admiral James F., Deputy Chief of Naval Operations, prepared statement of.......................... 134 Coburn, General John G., Commanding General, U.S. Army Materiel Command, prepared statement of.................... 118 Lieberman, Robert J., Assistant Inspector General for Auditing, Department of Defense, prepared statement of..... 5 Lyles, General Lester L., Commander, Air Force Materiel Command, prepared statement of............................. 127 Lynn, William J., Under Secretary of Defense (Comptroller), Chief Financial Officer, Department of Defense, prepared statement of............................................... 86 Steinhoff, Jeffrey C., Acting Assistant Comptroller General, Accounting and Information Management Division, U.S. General Accounting Office, prepared statement of........... 29 Turner, Hon. Jim, a Representative in Congress from the State of Texas, prepared statement of............................ 143 RESULTS OF THE DEPARTMENT OF DEFENSE'S FISCAL YEAR 1999 FINANCIAL STATEMENTS AUDIT ---------- TUESDAY, MAY 9, 2000 House of Representatives, Subcommittee on Government Management, Information, and Technology, Committee on Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 2 p.m., in room 2154, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding. Present: Representatives Horn, Walden, and Turner. Staff present: J. Russell George, staff director and chief counsel; Louise DiBenedetto, professional staff member; Bonnie Heald, director of communications; Bryan Sisk, clerk; Trey Henderson, minority counsel; and Jean Gosa, minority assistant clerk. Mr. Horn. The Subcommittee on Government Management, Information, and Technology will come to order. The subcommittee recessed after this morning's hearing, and we will proceed today with the results really of the Department of Defense's fiscal year 1999 financial statements audit. In February, the subcommittee began its third series of hearings to examine the results of financial audits of selected Federal agencies. Since then, we have learned that agencies have made some progress, especially in the area of receiving unqualified audit opinions. However, the important goal of maintaining financial systems that produce accurate, reliable financial information on a day-to-day basis continues to be a significant challenge to nearly all Federal departments and agencies, including the Department of Defense. Fiscal year 1999 is the 4th year the Department of Defense has prepared agencywide financial statements and the fourth time that the Department's Inspector General could not express an opinion on these statements. The Defense Department's financial information is simply not reliable. The financial management deficiencies at the Department of Defense continue to represent the single largest obstacle in preventing the U.S. Government from achieving an unqualified opinion on its governmentwide financial statements. As a result, the assets, the liabilities, and net costs of the entire Federal Government continue to be questionable. Again this year, the Inspector General reported that the Department of Defense cannot accurately report on its finances, including an estimated $196 billion in military retirement health benefits, $80 billion in environmental cleanup liabilities, and $119 billion in general property, plant, and equipment. The Inspector General also reported that the Department had to process $7.6 trillion in accounting entries to correct errors, add new data and force its financial data to agree with other data sources. At least $2.3 trillion of that money was not supported by documentation. Last month, the General Accounting Office, Congress's own auditor program fiscal and part of the legislative branch, found that controls over ready-to-fire, hand-held rockets, and missiles at one Army depot in Kentucky were inadequate, leaving these weapons vulnerable to undetected loss, theft, or unauthorized use. The General Accounting Office noted that although these problems were specific to one depot, it could represent a possible systemic weakness throughout the Army. In addition, auditors found that again in 1999, the Department of Defense was still unable to account for and control more than $1 trillion in physical assets, including ammunition and multimillion dollar weapons systems. These are just a few of the significant problems identified in the 1999 financial audit. Such lack of accountability, frankly, cannot continue. The Inspector General, the General Accounting Office, and Defense Department officials acknowledge that the Department's financial management systems are plagued with serious problems, in fact, so serious Department officials feel about this, they do not anticipate having adequate financial systems that can produce reliable information until the year 2003. Because of the significance of these problems, Department leaders must be committed to addressing both long-term and short-term issues. Today, we want to learn about the Defense Department's incremental improvements to its financial management systems and operations. We also want to explore what is being done to fix its serious, long-term financial problems. We welcome each of our witnesses and look forward to your testimony. I'd like to especially thank our distinguished guests on panel II for accommodating our invitation on such short notice: Commanding General John G. Coburn, Commander Lester Lyles, and Vice Admiral James F. Amerault. We thank you all. Just to give you the way we approach this, we do swear in all witnesses, and we don't want you to read your text. We'd just like you to summarize it, because we want to get you out of here on time. I believe General Coburn has to leave, and I think Mr. Lynn has to leave, and we want to get the most out of you while you're here. Those texts automatically that are written go into the hearing record the minute I welcome you as one of the presenters; and what we prefer, of course, is that summary that you can make. And then we can get into a dialog between those at the table, GAO, and Defense Department as well as those up here in terms of asking various questions for the majority and the minority. Although this is a very bipartisan committee, the questions are probably the same whether it's minority or majority. So let us start in then with the first presenter, and that is Robert J. Lieberman, the Assistant Inspector General for Auditing of the Department of Defense. Mr. Lieberman. I should swear you all in. If you've got some staff behind you that will whisper in your ear, get them up, too. [Witnesses sworn.] Mr. Horn. The clerk will note that they affirm the oath. Mr. Lieberman. STATEMENT OF ROBERT J. LIEBERMAN, ASSISTANT INSPECTOR GENERAL FOR AUDITING, DEPARTMENT OF DEFENSE Mr. Lieberman. Thank you. Chairman Horn, Mr. Turner, I appreciate the opportunity to be here today to talk about DOD financial management. The DOD efforts to compile an audit of the fiscal year 1999 financial statements were massive. Nevertheless, the Department could not overcome the impediments caused by poor systems and inadequate documentation of transactions and assets. In terms of audit opinions, therefore, the results differed little from previous years. A clean opinion was issued by us for the Military Retirement Fund, but the other funds of the Department, including the consolidated statements, were not in condition to merit a favorable audit opinion. So we had to disclaim. The GAO written testimony elaborates on results of our audits in considerable detail, so I won't repeat the rather lengthy list of deficiencies that precluded favorable audit opinions. Suffice it to say my office issued 36 reports over the last 12 months. I believe one of them was good news. The extent to which DOD must rely on unusual accounting entries to compile financial statements, which has been reported by auditors annually for 10 years but not fully measured until this year, perhaps would be instructive in terms of laying out how far the Department has to go to fix its financial systems. So I'm going to focus on that a bit in this summary. When the financial reporting system of a public or private sector organization can't produce fully reliable financial statements, accountants sometimes make accounting entries, often as recommended by auditors, to complete or correct the statements. Making major entries or adjustments is not the preferred way of doing business, and there is considerable attention paid to any significant change made to official accounting records. The notion of accounting records being made on a mass scale to compensate for incomplete and inaccurate financial reporting input is completely foreign to corporate America, as is the prospect of such adjustments being unsupported by clear audit trails. Unfortunately, the audits of the DOD financial statements indicated that at least $7.6 trillion worth of accounting entries were made to compile them. This startling number is perhaps the most graphic imaginable indicator of just how poor the existing automated systems are. The magnitude of the problem is further demonstrated by the fact that out of $5.8 trillion of these adjustments that we audited this year, $2.3 trillion were unsupported by reliable explanatory information and audit trails. Although there are procedural control issues involved, fundamentally, DOD needs across-the-board automated systems solutions so that it can compile financial statements like any other large business entity would and does. Unfortunately, developing automated systems on time and with adequate performance has never been the Department's strong suit, and it is still in the process of implementing the Clinger-Cohen Act. We have suggested that, in order to provide additional assurance that the systems development efforts necessary to achieve CFO compliance are successful, the Department adopt the same management approaches that were used for the successful year 2000 conversion. That's still an ongoing process. Implementation, frankly, has been slower than we would have liked. We intend to continue working closely with the Department to try to put that full process into place. The advantage of that process is, among other things, that it generates measurement information that can be used by the Congress, by senior DOD managers and other interested parties to understand how much progress has actually been made toward the goal. Right now, we're relying strictly on audit opinions for such information; and using audited opinions as the sole metric is really not satisfactory because a lot of progress can go on and not affect the overall opinion. I give at least one example of that in my statement. I also stress environmental liabilities in my written statement. There are a couple dozen major categories of deficiencies that we could have selected. I picked that one because it is, first of all, fairly easily understandable; and it also shows you the kinds of issues involved as we try to create Federal accounting standards that make sense for the Federal Government, generate information for financial statements that would be useful to the Congress and the executive branch and, finally, get all the different DOD components who have a share of those liabilities to compute them and report them so that they can be compiled. Each one of these several dozen categories of information that has to be collected is monumental in its own right. As you mentioned, the Department reported almost $80 billion in environmental liabilities. We feel that's considerably understated. We know that it is understated. These are large numbers. In every case they have to be compiled with the input of hundreds of different program offices and in some cases many dozen automated systems. Meeting that formidable challenge has been a high priority for the Department for 10 years. As you said, the Department has candidly said that its systems problems will not be solved before 2003; and even that probably is an optimistic estimate, given the fact that most system projects schedules slip both in the public and private sectors. With that, I'll close and welcome any questions. Mr. Horn. Thank you very much. [The prepared statement of Mr. Lieberman follows:] [GRAPHIC] [TIFF OMITTED] T0660.001 [GRAPHIC] [TIFF OMITTED] T0660.002 [GRAPHIC] [TIFF OMITTED] T0660.003 [GRAPHIC] [TIFF OMITTED] T0660.004 [GRAPHIC] [TIFF OMITTED] T0660.005 [GRAPHIC] [TIFF OMITTED] T0660.006 [GRAPHIC] [TIFF OMITTED] T0660.007 [GRAPHIC] [TIFF OMITTED] T0660.008 [GRAPHIC] [TIFF OMITTED] T0660.009 [GRAPHIC] [TIFF OMITTED] T0660.010 [GRAPHIC] [TIFF OMITTED] T0660.011 [GRAPHIC] [TIFF OMITTED] T0660.012 [GRAPHIC] [TIFF OMITTED] T0660.013 [GRAPHIC] [TIFF OMITTED] T0660.014 [GRAPHIC] [TIFF OMITTED] T0660.015 [GRAPHIC] [TIFF OMITTED] T0660.016 [GRAPHIC] [TIFF OMITTED] T0660.017 [GRAPHIC] [TIFF OMITTED] T0660.018 [GRAPHIC] [TIFF OMITTED] T0660.019 [GRAPHIC] [TIFF OMITTED] T0660.020 [GRAPHIC] [TIFF OMITTED] T0660.021 Mr. Horn. We now have the next presenter from the General Accounting Office, Jeffrey C. Steinhoff, who is Acting Assistant Comptroller General for the Accounting and Information Management Division. STATEMENT OF JEFFREY C. STEINHOFF, ACTING ASSISTANT COMPTROLLER GENERAL, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY LISA G. JACOBSON, DIRECTOR, DEFENSE AUDITS; AND DAVID R. WARREN, DIRECTOR, DEFENSE MANAGEMENT ISSUES Mr. Steinhoff. Mr. Chairman, it's a pleasure to be here today to discuss the state of financial management at DOD. The bottom line, DOD continues to make important progress in addressing its serious financial management weaknesses; and, at the same time, it has a long way to go. DOD's problems are pervasive, long-standing, deeply rooted, widespread, and complex in nature. What has been markedly different over the past 2 years is that DOD has, for the first time, clearly demonstrated a strong commitment to addressing its serious weaknesses. A number of important initiatives, both short-term and long-term, are under way and planned; and we're seeing positive results, as the IG just mentioned. I applaud Bill Lynn and his team for their efforts. This commitment, though, must be sustained over a number of years to turn plans into reality. A big challenge remains, and the finish line is not yet in sight. For that matter, it's not even close. For the short term, continuing efforts to standardize, streamline, and simplify processes--reengineering will be critical to success, as DOD's current processes are extremely convoluted and complex; to strengthen and enforce existing controls; to ensure basic transaction processing which today is a major impediment as the IG pointed out, to enhance human capital; and to oversee performance will be essential. At the heart of the long-term challenge, and this is a major challenge, is a financial system that is far from compliant with requirements of the Federal Financial Management Improvement Act and needs to be overhauled. The system is not integrated or tied together and really represents a patchwork of systems that individually have weaknesses, some very serious, and collectively just do not get the job done. Information does not automatically flow from system to system, and it really manifests itself as the IG stated, in the $7.6 trillion of adjustments to prepare DOD's fiscal year 1999 financial reports. And to give you some sense as to the difficulty of the challenge that DOD faces, this is DOD's own depiction over at your right on the poster board, of the current systems environment for its payment system, which as you can readily see, is overly complex. Around the outer edge are 22 payment systems that are fed by numerous other systems, systems that are generally not compatible or properly integrated and often do not use common data codes. For example, I have an example in my detailed testimony of a 65 character code. It's my understanding that some codes can exceed 100 digits. You make an error on one digit, the transaction gets rejected, it goes into suspense. You have to find it. They are very complex systems. In a nutshell, this tells the story as to what they are trying to fix and this is just one environment. Compounding the challenge is that most of the information needed to prepare annual financial reports and more importantly, I stress more importantly, to manage DOD's resources on a day-to-day basis comes from program or feeder systems--logistics, acquisition personnel--that are not under the direct control of the DOD Comptroller. He owns about 20 percent of the information. The other managers own the rest. So to achieve the endgame of the CFO Act--and the endgame is beyond financial reporting, it's not a clean audit opinion. It is systems that routinely generate good information for decisionmaking on a day-to-day basis so the gentlemen you'll be hearing on the next package have the data they need to do their jobs well. That's the endgame here. To achieve that endgame, DOD faces a system challenge that far transcends the operation of the Comptroller. I agree fully with the IG and support the efforts by DOD to use the Y2K process as a mechanism for addressing this. There are great lessons learned by DOD. They had had a success. I want to just focus on a couple of elements that I think are particularly important though. One, DOD recognized in Y2K that this was not just a CIO issue. This was a chief executive officer issue and the Deputy Secretary took direct control. Once that occurred, you saw a major change. You saw them moving there from the back of the pack up through till they had ultimate success. The issue with financial management as well as Y2K transcends the operations of DOD and the same type of high- level focus is needed. Several weeks ago, we issued this Executive Guide: Creating Value Through World-class Financial Management. And there are a lot of lessons learned here. This is what successful organizations do. This is how they have success. Organizations like Boeing, Chase Manhattan, GE, Hewlett-Packard, Owens Corning, and Pfizer. They determined that financial management is an entity-wide priority for which the chief executive provides clear, strong leadership including involvement in systems. Second, Y2K had a date certain. It also had interim milestone dates which were tracked and reported on. The same can be applied here. A clear plan with an end date and enforced interim milestones will be essential. Third, as the IG representative, Bob Lieberman stated, DOD must follow a standard discipline approach. It will be imperative that there be no shortcuts taken, that Clinger-Cohen be followed. Systems development has been a high risk area in DOD on GAO's list since 1995. Their last big effort, the corporate information management initiative, went on for about a decade and did not succeed; so it is very important that this project be very closely monitored. And finally, for Y2K there was extensive validation and verification by the IG as well as end-to-end testing. It just can't be in the environment of preparing financial reports. This all has to be addressed in the environment of having management information for DOD. In closing, a sustained high level commitment that transcends this administration will be key to the ultimate success of DOD's reform efforts. Likewise, sustained congressional attention such as this hearing and the light you've placed on this issue over the past 5 years will be critical to really instilling the expected accountability in DOD. Mr. Chairman, this concludes my remarks. I'd be pleased to answer any questions that you or Mr. Turner may have. Mr. Horn. Thank you very much. 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As usual, we have had some excellent presentations so far, and we now move to the honorable William J. Lynn, Under Secretary of Defense Comptroller and Chief Financial Officer of the Department of Defense. He's accompanied by Nelson Toye, Deputy Chief Financial Officer. So Mr. Lynn. STATEMENT OF WILLIAM J. LYNN, UNDER SECRETARY OF DEFENSE (COMPTROLLER), CHIEF FINANCIAL OFFICER, DEPARTMENT OF DEFENSE, ACCOMPANIED BY NELSON E. TOYE, DEPUTY CHIEF FINANCIAL OFFICER Mr. Lynn. Thank you very much, Mr. Chairman, members of the subcommittee. Mr. Chairman, I do welcome the opportunity to be here today to discuss the financial management of the Department of Defense. As you already entered my formal written statement into the record, I'll just cover a few of the high points in my opening statement as you requested and then turn to your questions. About a year ago I appeared before this subcommittee to discuss the Department's financial management initiatives. I said then and repeat now that financial management reform continues to be a high priority for the Department's senior leaders. As the Department's Chief Financial Officer, financial management reform is my highest priority. I remain encouraged by our substantial progress and in particular by the commitment of the people advancing that progress, but as has been pointed out here today by the other witnesses, we have much left to do. Today what I'd like to do is give you a status report on our major initiatives and highlighted challenges ahead. While the Department has had many notable successes in its financial management reform, the reality is that it's impossible to overhaul our financial management operations overnight. The plan reforms will require years to fully implement and require a sustained commitment over not just this administration but future administrations. Nonetheless and though much remains to be done, we are making progress. Let me divide financial management reform of the Department into thee major phases. The first phase is to consolidate our financial management operations. That phase is complete. We have consolidated over 300 finance and accounting field sites scattered throughout the world into 26 locations. That in itself has produced financial savings over $120 million annually. More importantly, this organizational consolidation has enabled the second phase of financial management reform, the elimination of incompatible and not compliant financial systems. This phase two is well under way. The number of non- compliant finance and accounting systems has been significantly reduced. In 1991, we had 324 finance and accounting systems. None of them met today's requirements. Today we are down to 96 and by 2003, we expect to have about 30 finance and accounting systems overall a 90 percent reduction, and we expect all of those finance and accounting systems to be compliant with current accounting standards. If we succeed at that, Mr. Chairman, we will have brought DOD from very low standard in terms of other commercial style entities up to the head of the class in terms of the number and the compliance of its finance and accounting. We're about two-thirds of the way there, and we intend to finish it. The third phase: We've recently initiated this phase which is to upgrade the interfaces with functional systems that feed data into finance and accounting reports. More than 80 percent of the data on DOD's financial statement comes from outside the finance and accounting network. The data comes from personnel, from acquisition, from logistics, from medical, and other systems. It has to be inputted into the finance and accounting systems to provide the finance and accounting or provide the accounting reports that are necessary to produce audited financial statements and to produce the kind of management information that's needed to oversee the Department. Establishing a seamless connection between these so-called feeder systems and the accounting systems used to prepare financial statements is the crucial final step in financial management reform. These feeder systems were developed and put into service well before the promulgation of Federal accounting standards. They simply were not designed to produce business- style financial statements. Accordingly, much of our financial information has to be manually transfered from these systems into the accountant system. Indeed, some of the information that the auditors insist upon is simply not available within those systems at all and therefore has to be estimated in some way. The systems just don't produce the information. Let me give you an example. Our inventory systems primarily are designed to maintain records on the latest acquisition costs. This is the data the logistic managers find most critical. The systems do not retain, in most, cases the historical costs of items, which is the data that the auditors want for their financial statements--for our financial statements. We are moving to upgrade our inventory systems to retain both historical and latest acquisition costs, so that single inventory system will produce both the data needed to manage the logistic system as well as to produce the finance and accounting statements, but this is an expensive and laborious process. It is going to take several years. The third phase of this--of financial management reform is going to extend well beyond the financial arena. It touches nearly every other function of the Department. To oversee this massive effort, we've accepted the recommendation of both the GAO and the IG that we establish a Y2K-like process run by a panel. The panel will report to the Deputy Secretary through the defense management counsel and the panel will as in the Y2K effort establish milestones, review progress, and monitor implementation to move the 70 or so critical feeder systems into compliance with current accounting standards. In order to accomplish the fundamental financial management reform that we have in mind, we will have to complete this effort to establish the interfaces with all these critical feeder systems. This will take several years and substantial new resources. In the interim, however, we believe we can make substantial progress toward earning an unqualified audit opinion for the Department. Toward that end, we've collaborated the organizations and individuals represented at this table to identify major obstacles that must be overcome for the Department to be successful. We have developed interim solutions to systemic problems, and we are applying accounting and auditing standards in ways that make sense for the Department of Defense. Major deficiencies that have prevented us from receiving a favorable audit opinion in the past have been identified; strategies to deal with those deficiencies have been developed and are being coordinated with my colleagues at this table today. Details of those strategies are discussed at some length in my written statement for the record. I'm happy to go into further detail on any questions you might have. Let me close, Mr. Chairman, by saying that during my tenure as the Department's Chief Financial Officer, I witnessed substantial progress and an extraordinary transformation of our financial activities as well as other financial areas with which those activities must interact. This progress reflects a collective effort spanning both the financial and the non- financial communities. I want to publicly acknowledge and offer my sincere thanks to my staff as well as the staff element also of the other principles within the office of the Secretary of Defense, the Defense Accounting Service, the military departments and the defense agencies for their hard work and for their dedication. In sum, we have built a strong financial management reform foundation upon which those that follow us can build. We remain determined to have financial management reform so well advanced by the time the next DOD leadership team takes over, that it will conclude that completing the job is not only wise and necessary but achievable. Our DOD leadership team also has been determined to keep foremost in our minds that the Department's primary mission is national security. Our reforms must support that mission, not burden the troops and support activity who fulfill it. We've been asked by Congress and the audit community to do things not previously required of the Department. Our challenge is to design such new procedures so that they enhance, not diminish the Department's management and leadership and the accomplishment. Its overall mission. In closing, Mr. Chairman, I would like to thank you and the subcommittee for this opportunity to discuss financial management reform within the Department. I'm happy to answer your questions. [The prepared statement of Mr. Lynn follows:] [GRAPHIC] [TIFF OMITTED] T0660.076 [GRAPHIC] [TIFF OMITTED] T0660.077 [GRAPHIC] [TIFF OMITTED] T0660.078 [GRAPHIC] [TIFF OMITTED] T0660.079 [GRAPHIC] [TIFF OMITTED] T0660.080 [GRAPHIC] [TIFF OMITTED] T0660.081 [GRAPHIC] [TIFF OMITTED] T0660.082 [GRAPHIC] [TIFF OMITTED] T0660.083 [GRAPHIC] [TIFF OMITTED] T0660.084 [GRAPHIC] [TIFF OMITTED] T0660.085 [GRAPHIC] [TIFF OMITTED] T0660.086 [GRAPHIC] [TIFF OMITTED] T0660.087 [GRAPHIC] [TIFF OMITTED] T0660.088 [GRAPHIC] [TIFF OMITTED] T0660.089 [GRAPHIC] [TIFF OMITTED] T0660.090 [GRAPHIC] [TIFF OMITTED] T0660.091 [GRAPHIC] [TIFF OMITTED] T0660.092 [GRAPHIC] [TIFF OMITTED] T0660.093 [GRAPHIC] [TIFF OMITTED] T0660.094 Mr. Horn. Thank you very much, Mr. Secretary. I'd like to know how you're proceeding to make sure that next year this situation will not occur. Are you working with the services and your people working with the services? Who are we pulling together to get the seriousness of this situation, and how are you going about it just as an open-ended question? Mr. Lynn. Mr. Chairman, we have two approaches. We have a short-term and a long-term approach as I alluded to in my statement. Over the long term, as I think the other witnesses indicated, the only solution is systemic improvement. We need to get the finance and accounting systems compliant with the CFO Act and the other legislative requirements and we need-- we're well within range on that. Bob Lieberman may be right. 2003 is aggressive and optimistic but we're not going to be far off of that and I think he would probably agree with that, that we're going to be very close to achieving that date or something close to it for the finance and accounting systems. But for the other systems which comprise 80 percent of the data, the challenge is even stronger because those systems were never designed to provide this kind of data and it requires a complete overhaul of at least 70 critical systems. To undertake that, our long-term approach is to set up exactly as has been recommended, a Y2K-like process that will take as we did with Y2K, take those 70 systems, go through the 5 phases starting with awareness through renovation to compliance and testing. As we move each of those systems into a compliant phase, we'll improve the financial management data of the Department. That's a multi-year process. In order not to be waiting in line for that development, we've also developed a short-term process, short-term meaning less than multiple years but probably will take us at least 2, maybe 3 more years at least which is to develop, try to get a clean opinion by tackling deficiency, by deficiency, the problems that we have, working with the audit community, trying to develop--work around trying to develop auditable estimates. Where we can't produce the data through the systems, we work through the general property area relatively well on that area. We're working now on the personal property area. We started to discuss some of the areas that were mentioned at the other end of the table in terms of environmental liabilities and health care liabilities. We're trying to take each of the major show stoppers that the auditors have identified and develop a short-term process that will give us more reliable data such that we hope we can get a clean opinion. Mr. Horn. In testimony that will come after you leave, General Coburn will have spoken of several significant initiatives under way in terms of the Army and particularly the materiel command of which he's commanding general. I'm curious and also General Lyles for the Air Force materiel, he will have stated that the imperfect data is inevitable due to the 161 feeder systems that use thousands of interfaces to pass critical information. Now, Mr. Steinhoff noted in his testimony that the logistics systems and the general ledger systems are not integrated. Is that true? Mr. Lynn. Yes, it is. Mr. Horn. And what are we doing to try to get those? You know, about 4 or 5 years ago when Mr. Hamre came up here, my hearing was titled ``what did you do with the $25 billion we can't find.'' So I asked John how many years is it going to take to untangle that. He said, well, give me a couple of years. A couple of years went by and presumably you had it down to about $10 billion instead of the $25 billion and a lot of it was in the Columbus, OH, Army processing operation where checks were just spewed out to small business people, etc. And I wondered are we getting on top of acquisition and inventory so you can find some of these things and what's your feelings on this. Mr. Lynn. I think what you're talking about in terms of the numbers with Dr. Hamre were problem disbursements. We brought problem disbursements down from a high of I think $31 billion half a dozen years ago to about $5 billion today. We are gradually and steadily making progress on this. Progress, it involves going out to two causes. One of the causes was in fact the consolidation I described at the beginning of my testimony. When we pulled 330 finance and accounting stations into 26, there were inevitable difficulties in terms of recordkeeping and establishing proper internal controls. We've had a number of issues. I think we have resolved most of those. We've now completed that consolidation as I said 2 years early, and I think we're working through now most of the organizational impediments to those problem disbursements. What remain are system impediments. In order to properly account for all of the disbursements and match them with the corresponding obligations, what we need are automated systems ultimately. That is, as I say by 2003 we think we will have those. We're about two-thirds of the way to that. It's that two-thirds of the way that has produced the progress that we've had to date and I think we will bring the number down very much further as we bring on the other third of new finance and accounting systems. Mr. Horn. You obviously have jurisdiction over the three basic services; and when you look at some of that from how a financial statement is prepared, are the three services able to get commonality in terms of inventory categories? I realize they are very different between services, but that's something that the private sector certainly can solve. And when you've got different corporations under one large corporation in terms of a conglomerate, what's your feeling in terms of the services where the core of this whole operation starts with them and the only reason we have a Department of Defense is--that's to coordinate the efforts of the basic services. And of course, we've evolved in the last 20, 30 years with super agencies within Defense on accounting logistics and all that. What's your feeling? Are you getting the basic raw material on the right steps that it aggregates to the financial statement or have we got weird things going on in the three services so they can never get in something that is inputted when it's aggregated step after step. So I'm just curious how difficult that is when you look at it from the top of the Pentagon to the people you're serving down at the bottom. How do you deal with that? Mr. Lynn. There is certainly as you say, Mr. Chairman, inconsistencies between how the different military departments treat issues although I would not trace our challenges and problems to that primarily. We are generally able to overcome those inconsistencies and in particular with the establishment of the Defense Finance and Accounting Service, we're able to establish common policies and definitions and use those to build financial statements. I don't think it's cross service inconsistencies that cause our problems at least primarily. The problems we have primarily and what I alluded to in our statement is the bulk of the systems and the systems for which the next panel is responsible for were never constructed to produce the kind of financial data that's necessary for financial statements. We're endeavoring to change those systems to put modules in those systems or to upgrade those systems to provide that data, but that's a massive task. That's the challenge. It's that challenge in changing the systems to establish a seamless Web from the logistics systems, from the personnel systems, from the medical systems into the finance and accounting systems. We need to be able to transfer that data in a seamless automated way. We're not now able to do that, and that's our main challenge. Mr. Horn. So you're optimistic. Is that what that boils down to? Mr. Lynn. Yes. Mr. Horn. The basic number of accounting systems I assume was merged a little bit during the Y2K exercise. What number of accounting systems do you have within the Department of Defense at this point? Mr. Lynn. We have 98 finance and accounting systems. We can provide that for the record. Mr. Horn. Please provide it for the record. I think there's been a figure when General Page was testifying here, and there was more than that 10 years ago. Mr. Lynn. 10 years ago there were 330. Mr. Horn. Was that it; 330? Mr. Lynn. Approximately, yes. Mr. Horn. Well, do you think--how much further do you think we can go with some basic accounting systems? Mr. Lynn. We think we can get the finance and accounting systems down to about 30. Mr. Horn. Have you ever examined some large corporations in this country and looked at how they do this? And have we learned anything from it, or is it something that just isn't relevant? Mr. Lynn. It's relevant although not completely. The purposes for which commercial entities use financial statements are quite different. They use them in terms of bond ratings, in terms of loans. Frankly, we're not interested in valuing the Department so we can sell it. It's the--the differences are substantial; but where we have a common ground with commercial entities is, and I think it's what Jeff Steinhoff talked about, it's not the financial statement itself. It's the underlying systems that produce the data in the financial statement. And their corporate leaders need reliable and accurate financial data and so too does the Department. So to the extent that a financial statement is just a measure of your systems' ability to produce reliable and accurate data, then it's an important measure for the Department although the use in and of itself of that statement is quite different than in the corporate world. Mr. Horn. I'm curious. Mr. Steinhoff, you've heard the testimony of Mr. Lynn. Where are the weaknesses? Mr. Steinhoff. Basically the weaknesses are in the systems. They've got disparate systems that were developed in a stove pipe environment, each service developing its own systems over the years. The systems don't work as intended. They don't tie together. They are not integrated. As all the panelists have said today, the systems can't readily exchange information. It has to be drawn out from the systems and even then you don't know if it is, in fact, reliable. There's a big problem in processing transactions. It's an incredibly complex environment. One study done by the Air Force a few years ago found that if they changed the way they accounted for reparable items, in accord with private sector accounting, they wouldn't care if an item went from one status to another for purposes of accounting. But in DOD the way the system was designed, they accounted for every separate event. The study that was done for the Air Force found that they could have eliminated 155 million transactions or 78 percent of the transactions being processed. So they've got just a huge volume of transactions from systems that were developed many years ago and were not developed under a systems architecture for the Department. You asked a little bit about best practices or what's done in the private sector. What we found in our study is that the finance and accounting doesn't sit separately in the private sector. It's integrated into the business processes. It's part of the business processes, and whatever comes out of the business process is adequate for financial reporting. The key being real time information of value to the business managers, which is the endgame the Comptroller General talks about. What we're really looking for is for the financial information to come from the business systems as a by-product and for financial reporting to be something that just routinely occurs. Social Security is preparing their financial report within a matter of weeks after the close of the fiscal year whereas many departments struggle and take months and months because the systems, in fact, are not tied together. Mr. Horn. Well, we thank you. I now yield 15 minutes to my colleague, the ranking member, Mr. Turner, the gentleman from Texas. Mr. Turner. Mr. Steinhoff, I want you to try to illustrate the importance of the issue we're discussing today by maybe giving us a few examples of what this failure to have these systems in place and to have the seamless transition data from the logistics personnel, medical, other systems and the financial management systems, what's this costing us? What's the cost to the taxpayers for the failure to come to grips with this issue that we come and talk about year after year which we still are talking about dates in the future when we hope maybe the financial and accounting systems will be in place in 2003 and then we haven't even talked about dates to get systems in place beyond that. Give us some sense of--if this is just a matter that accountants would like to talk about, then we can keep talking about this year after year; but somewhere in here I suspect there's a significant cost to the taxpayers for our failure to come to grips with this. Mr. Steinhoff. This has adverse impacts on the ability to control costs in the Department. For example, Defense has recognized the lack of cost-accounting systems to be one of its major impediments to controlling the cost of weapons systems. Also, for the past several years, has had large losses in its working capital funds, in part because it's very difficult to set prices without good cost information. In addition, because of weaknesses in the systems, visibility over billions of dollars of assets have, in fact, been lost which puts these items at risk and also is one factor in purchasing items that are not needed. At the end of fiscal year 1999, I believe about 58 percent of Defense's secondary inventory, about $37 billion, is in long supply or unneeded. In part, visibility and good accounting information is one reason for that, not the sole reason but one reason. We have found many times because of breakdowns in controls, things have occurred that shouldn't occur, and things haven't happened that should have. For example, we found that foreign countries have not always been billed under the foreign sales program because there wasn't good visibility over the deliveries that had been made so therefore the billings reports were not made. This past year we identified, for example, $330 million of R&D costs, non-recurring costs that had not been billed to foreign countries. In addition, some of these problems have been reported for decades, I want to put in perspective that the challenges Mr. Lynn and his top team are trying to tackle are decades old. GAO has been reporting on these types of problems since I've been at GAO, and that's over 25 years. Most of these areas are on our high risk list; so this is a very difficult issue. I think there are also lost opportunity costs. Instead of managing by cost oftentimes people manage by budget. They get the budget dollars and obligate and spend the budget dollars without data on what was achieved in terms of cost, what was the cost of this depot as compared to that depot, or could this have been done this more efficiently and effectively. That's really one of the key components of the CFO Act. It calls for the systematic measurement of performance, it calls for the development of cost information, and it calls for the integration of systems. That's the key, that's the endgame. There is a great loss when you don't have that kind of data day to day. Mr. Turner. Secretary Lynn, can you add to that list? It's a fairly exhaustive list I know, but do you have anything to add to the areas that are apparent to you where we are actually costing taxpayers dollars because we have failed to get these systems in place? Mr. Lynn. From my perspective, Mr. Turner, the biggest issue is to get at the infrastructure costs of the Department to try and reduce overhead. In order to be able to reduce overhead, we have to have a very precise understanding of what activities cost what amounts because we're going to have to try and streamline those activities. In that area, our data is limited and it limits our ability to reduce overhead. I think that's the biggest challenge that goes unanswered as a result of inadequate cost accounting systems. Mr. Turner. You mentioned this 2003 date you thought was a reasonable date. I think it's September 30, 2003 for getting the financial and accounting systems in order and in place. What's the estimate of what it's going to take to get the rest of the systems where they ought to be? Mr. Lynn. That's the first job of this new panel that we have set up to review the systems first. As I say that number, we think, is about 70 but it may be--there's quite a few more systems in this area. We think there are 70 critical ones, but the first job is to review first what are the critical systems and what's a reasonable schedule to set up milestones for bringing these systems into compliance. So we'll have to provide that as soon as we've developed it in that panel. Mr. Turner. It seems like in order to carry out our oversight role, it would be helpful if we had that group establish those benchmarks, those deadlines and we could be aware of them and hold the Department to those dates. Otherwise, we're going to continue, down the path of talking about this and these dates continue to slip; and I think it would be very helpful to us if we could know about what date will we be able to see the entire schedule to accomplish this monumental task that we're talking about here today. Mr. Lynn. I think that's a fair request, Mr. Turner. As I say, we can provide that for the finance and accounting systems. We've already provided it for the consolidation. As I said, we gave you a schedule for the consolidation; and we beat it by 2 years. The next stage which is making the finance and accounting systems compliant will be more difficult still, but we think we are on track for 2003. And we're developing the schedule for the third most important phase which is the compliance of the feeder systems and, we'll provide that schedule to the committee as soon as we have it. Mr. Turner. How long are we talking until that schedule will actually be developed? Mr. Lynn. We're working on it this summer. Before the end of the year. Mr. Turner. When we talk about a schedule to accomplish these tasks, what are the elements necessary to shorten that timetable? We've heard references to perhaps the most important and that is leadership from the top, emphasis on this problem. What are the other elements? Are we talking about additional staff, additional dollars? What does it take to bring these systems to a point where we find them acceptable other than just sheer leadership and emphasis on the issue? Mr. Lynn. It is going to take both additional staff and additional dollars. We have put additional funding into the 2001 budget request to accomplish exactly that. We'll be reviewing this budget. I think we'll build on that. It also will take additional staff. We're working with the IG and the GAO to go outside the Department's own capabilities in this area and to hire outside CPA firms to help us with the remedial efforts that we clearly need in developing these systems. We're hiring agency by agency individual audit firms to go through what the steps are in terms of system improvement in order to be able to clean up our financial data. Mr. Turner. Thank you, Mr. Secretary. I yield back, Mr. Chairman. Mr. Horn. Well, I thank the gentleman. Those are excellent questions. Mr. Steinhoff, as a premise to the rest of the panel, in your testimony you stated that the General Accounting Office, the Army depot personnel identified 835 quantity and location discrepancies associated with 3,272 ready-to-fire hand-held rocket and launcher units. Now, could you describe how this happened and what it all means? Mr. Steinhoff. We visited the Army depot to really gain an understanding of its control system. We went to the first storage location and looked at one of the first items there. It was this hand-held rocket which is a sensitive item. Because of its classification as a sensitive item, it must be controlled by serial number and it must have a continual audit trail. Those are the requirements from DOD, and we found items that were being stored that weren't on the accounting records, weren't on the property records. What we found working with the depot folks and they were very responsive and got right on top of this, what we found was that several shipments of rockets had been received but there was a glitch in entering it to the system. It rejected. It went into a suspense account. Automatically after 10 days anything that hadn't been cleared from suspense was just dropped. Therefore it wasn't flagged. The items were on the floor. They weren't on the records. At the same time, at the first location we went to, we found things on the floor that were on the records but they were on the records for a non-location. So in all we found 414 for which there was no property record that it was there, and we found another 421 that there was a property record but it was in the wrong place. So visibility is lost over this item. Mr. Horn. Mr. Lieberman, I noted when Mr. Steinhoff was responding to my questions about what did you disagree with the Under Secretary and you were nodding your head so you seem to agree with Mr. Steinhoff and let me ask you about inventory. You continue to report on inventory controls and it's a major problem for the Department. In February, you reported the inventory problems related to chemical protective suits which have been identified more than 2 years ago and were still not corrected. Could you tell us what you found out? Mr. Lieberman. Yes. In 1997, we had reported that, at the defense depot in Columbus, there was very poor inventory control, drastic discrepancies in numbers of suits that were shown on the inventory records as opposed to suits that were actually counted when we observed physical counts. We recommended that wall-to-wall inventories be done. There are 20 different types of suits. They are not all the same so it's important to keep them separate and keep good inventory control because these have to be issued to operating forces that are being deployed. DLA agreed to work on the problem in general, and fix the suit problem specifically. Part of their answer was to move responsibility for the suits and the suits themselves to the defense depot in Albany, GA. So we did a followup audit this year down there. We found the situation actually was worse. We observed a count of the inventory of 1 of the 20 types of suits, the most commonly used kind. The inventory records said there should have been 225,000 of them there and actually there were 194,000. No one could tell us what happened to the remaining 31,000 suits. This is typical, I'm afraid, of the kind of inventory accuracy problems that we have been running across; and I think one of the advantages of the CFO Act which is commonly ignored is that it levies more stringent audit requirements on numbers that the Department of Defense in the past has just sort of accepted as being right without a whole lot of audit validation. Inventory accuracy numbers are typical. Recently GAO reported that for the fourth quarter last year, DLA's inventory accuracy rate was only 83 percent, which is very poor for logistics inventory standards, and all three military departments have reported the same kinds of problems. Mr. Horn. Now, in the potentially defective chemical protective suits, when you went back you found out they were not separated from the usable suits. I'm just curious what do these suits cost? What's the worth on them? Mr. Lieberman. The 31,000 missing suits were worth about $1.4 million. Mr. Horn. $1.4 billion. Mr. Lieberman. Million. Mr. Horn. Oh, I thought the Pentagon only had billions. OK. Sorry about that slip. Mr. Lieberman. They are not terribly expensive on a per unit basis. They are just glorified rubber basically. Mr. Horn. What about the separation? Why are they saving potentially defective chemical protective suits? Is there some rigmarole they have to go through to get them off the inventory or what? Mr. Lieberman. I have to be very careful talking about this particular case because sentencing proceedings are still in process for some contractor personnel involved in selling defective suits to the government and some of the questions pertaining to what was wrong with the suits are involved in the sentencing procedures. But in general, again I'm afraid this was not as much of an anomaly as we might think. There are a lot of products in the inventory system where the lots are merged together, where we don't have particularly good visibility over exactly what we have where. And when an issue does come up concerning the quality of something, whether it's a chemical suit or fasteners or something like that, sometimes it's difficult for the supply people to isolate that particular batch because everything has been merged into a warehouse or into a bin in a warehouse or on to shelves. And the typical warehouseman can't distinguish them. They all look the same to them. So if there's not serial item control like there is with a piece of equipment, it gets very difficult sometimes. There were several reasons involved why DLA was slow in getting these particular suits out of the inventory. Some of them had to do with communications both within the depot and between DLA and the users of the suits around the world. Mr. Horn. I'd be curious how that's used. I mean, are these used by soldiers on the line, by fire departments on various bases or what? If somebody says we need 20 of these at Leavenworth or Camp Stewart or Fort Stewart and they go grabbing 20 and they don't know whether they are defective or not defective makes no sense to me. Mr. Lieberman. Absolutely. There's no rule any place that says it's OK to keep known defective products in the inventory. The problem here was that after questions were raised about the quality of the suits, DLA did not react fast enough to find them and pull them back. These suits are used by combat units. They are issued to people who would face possible exposure to nerve gas agents and things like that. Mr. Horn. So if in our various pursuits around the world now, if someone says in Kosovo, a major country, says wait a minute, we'll slow them down and they don't have the protective suits because they are defective. Mr. Lieberman. Fortunately the inventory of chemical suits was very large so I haven't heard that pulling the defective ones out has really had a readiness impact. But I would have to get back to you on whether there's any perceived shortage. Mr. Horn. I just wondered. It seemed to me a good master sergeant would straighten that inventory out with the services. Maybe the Defense Logistics Agency, maybe they don't have a good master sergeant. That might be part of the problem. But it seems to me when you find there is something wrong, you get rid of it and granted if the contractor's playing games, then the need is to deal with that contractor. Apparently they are from what you tell me. Mr. Lieberman. Yes. Mr. Horn. Let me just cover a few more things because I know Mr. Lynn has other commitments also. Let me ask about Mr. Steinhoff as a predicate to this with Mr. Lynn on the antideficiency act. Do you find in the GAO where anybody in any cabinet department and particularly Defense ever even talks about the antideficiency act. Mr. Steinhoff. I can't say for that meeting per se but that is an area that people in the financial community do talk about. It's a law on the books and, the issue of fund control is an important issue to the accountant. With respect to any penalties that might be accrued from having an Antideficiency Act violation, if that's what you're getting at, no, I know of no cases where there has been a criminal penalty from the violation. Mr. Horn. In your testimony, you noted the Department was unable to support $378 billion in net costs, and that the Department typically uses unreliable obligation data as a substitute for cost data. Could you elaborate on that and tell us about the effects on budget data used by managers? Mr. Steinhoff. The CFO Act calls for the development of cost information. Across government, not just in DOD, across government, this represents a major challenge because government is typically managed based on budget numbers or inputs versus outputs and cost. As I mentioned before, DOD cited the lack of cost accounting systems as the single largest impediment to its ability to oversee its weapons systems cost and development. And lack of good cost data affects the ability to make economic choices, such as A-76 studies, and investments in IT, to evaluate programs, such as health care which is a big cost in Defense, and to control costs such as working capital fund pricing that I mentioned before. Because of a lack of cost accounting systems, they've used budget data as a proxy forecast, and this budget data wasn't developed for that purpose. Also, it's basically not totally reliable itself, and therefore, the IG was unable to audit the Statement of Budgetary Resources. The Statement of Net Cost also could not be audited. We find in our work that the obligated balances aren't always reliable. The unmatched disbursement issue impacts on this. The fund balance with Treasury or the cash account doesn't balance. So what you have basically is the need to develop accounting systems to provide this basic data. Mr. Horn. Mr. Lieberman, what do you think about Mr. Steinhoff's comments on that $378 billion in net costs and the Department typically using unreliable obligation data as a substitute for cost data in, has that been your finding basically? Mr. Lieberman. Yes, it has. I certainly agree with that, and it's really important to have accurate obligation data because if you have invalid obligations on the books, you're tying up money that will not be used for anything else. And if you don't identify those obligations as being invalid by the time the obligation availability of the appropriation expires, you're never going to be using that money for the purpose for which it was appropriated. Mr. Horn. Mr. Lynn, the ball is now in your court. What's being done to address this situation. Mr. Lynn. I think it's what we've talked about, Mr. Chairman. What we're trying to do is shift a system that frankly for 200 years was designed around the presentation of the budget to Congress. That focuses on obligations and disbursements. For those purposes, the system works reasonably well. We're able to track those and report to our oversight committees on what--how we've spent the money and how it has been done in accordance with congressional direction. What we've only recently in the last decade or so tried to do is a business style accrual base system which is used for a different purpose, not so much for reporting to our oversight committees on how the budget has been spent but for the kinds of things that Mr. Steinhoff and Mr. Lieberman are talking about, evaluating costs in the working capital fund, trying to eliminate overhead by identifying activities that are low payoff and high cost, trying to understand the various liabilities over the long term the Department faces and to accord for those in the normal process. We're trying to shift that system. It is a substantial overhaul, and we're only partway there. Mr. Horn. You noted that you're developing a comprehensive financial management improvement plan and have you had a chance to review that one yet? Where is that within the bowels of the Pentagon? Mr. Lynn. We are producing our second one--excuse me. We've produced our second. We're in the process of producing a third. The difference, in the first one we largely focused on the financial and accounting world itself. In the second one we've moved out, tried to identify the feeder systems and the core of the third one will be to try and implement this Y2K process that we've talked about which will do the overhaul of those feeder systems and bring them into compliance with the various statutes. Mr. Horn. Mr. Steinhoff, do you have any comments on the Department's financial management improvement plan or its implementation? Mr. Steinhoff. Yes. First, this is an important milestone, a step forward for the Department. I applaud those efforts. We did review the first plan. We've made a number of recommendations to the comptroller. They really get to some of the issues I mentioned before, the need to really describe this plan and maybe this is the third plan Mr. Lynn is speaking about, but how financial management will support the other functional areas. It will be very important that the plan go beyond financial reporting to the overall management processes of DOD. Also how the plan ties to budget formulation, how the several hundred projects in the plan actually tie together toward DOD's vision and how the quality of the feeder systems, that data will be improved because those systems need quite a bit of improvement. The final comment I'll make about the plan, I said it before, it will be imperative, I can't say this strongly enough, that the concepts of Clinger-Cohen be followed. Clinger-Cohen has got rigor to it. It requires some heavy lifting. It requires some times for you to step back and not move forward until you've gone through certain milestones and certain steps but it is essential. At the IRS which also has serious systems problems, they have been put on a very strong Clinger-Cohen by the Congress where their funds are rolled out to them for modernization one bit at a time and they go through certain milestones and they've done certain things like having established systems architecture in place. And it will be very important that systems efforts--and this is, as I said before, a world class systems challenge, they are trying to deal with decades of problems here, that that be very strictly enforced and that those concepts be followed, no shortcuts be taken, and that the money be very well spent. Also, I wanted to clarify a previous statement I had. I have an attorney here with me today. He commented I was wrong when I said that no one has been punished for antideficiency. There have been no criminal prosecutions is what I meant to say. There have been administrative admonishments to some employees. Mr. Horn. Is it admonishments, or is it not trusting that particular contractor in the future? Clinger-Cohen ought to give them enough flexibility to say no; is that correct? Mr. Steinhoff. Yes, yes. Mr. Horn. Mr. Lieberman, how does the Inspector General feel about the financial management improvement plan? Mr. Lieberman. I thought it was long overdue, and I think in fairness we ought to recognize that the idea was born in the Senate. There was a 5-year plan that OMB compiles, but the Defense authorization act from 3 years ago was now--created a new requirement for this plan and with a heavy focus on systems, which was absolutely appropriate. It is an evolving type thing, and, as Mr. Lynn said, each year DOD has improved it and added things to it, which certainly needs to continue in the future. There are still a few concerns I would have about it. I still think it's too much of a comptroller community document, not well known outside the comptroller community. I think it's still too much of a one-time annual snapshot as opposed to a living document that's used by management during the year to actually control this whole effort as a program. And it still doesn't have enough information in it on what is this is costing. There's beginning to be specific information on some of the systems, but everybody has wondered for 10 years what this whole effort is costing and even more, how much more do we have to spend to get from here to there. So with the proviso that there is going to be continued effort to refine the plan, I think it's excellent. Mr. Horn. Would anybody like to comment? And feel I haven't asked them the right question. You can have the last word on this. Mr. Lynn. Let me take the opportunity, Mr. Chairman. You asked for the precise data on the number of accounting and finance systems. You'll find that on page 3 of my written statement, provide you the numbers starting in 1991 and going through the plan in 2003. In terms of a wrap-up, Mr. Chairman, I want to thank again the committee for holding the hearing and frankly keeping our feet to the fire. This is an important area. I think we have been treating it as such. As Mr. Steinhoff has indicated, this is a decade, and I would actually say centuries. We went centuries without trying to do this. It is going to take us at least decades to establish the kind of controls and systems that we think we need to provide the data, but I think we have made two important steps forward in terms of the consolidation of the financial operations of the Department. We're nearly there in terms of the upgrade of the finance and accounting systems, both Mr. Lieberman and Mr. Steinhoff have appropriately pointed out that we need to broaden this beyond the comptroller community, beyond the finance community and get at the logistics, the acquisition and the personnel and the other communities to make sure that the data that comes into the financial system from those areas is audible and reliable and accurate. We're working with those. I have worked closely in particular with Jack Gansler who is the Under Secretary who oversees most of those to try and make that happen. Thank you, Mr. Chairman. Mr. Horn. We thank you. Can we get the IG and the GAO to stay with panel II? We'd appreciate it. We'll get some closure here. So you're certainly excused, Mr. Secretary, and thank you for coming. We wish you well. Mr. Lynn. Thank you, Mr. Chairman. Mr. Horn. We now go to panel II, General Coburn, General Lyles, and Vice Admiral Amerault. So if you'll please come forward. We'll swear you in. [Witnesses sworn.] Mr. Horn. The clerk will note that the three witnesses have affirmed the oath. And we will start with General Coburn. General, it's good to see you again. STATEMENTS OF GENERAL JOHN G. COBURN, COMMANDING GENERAL, U.S. ARMY MATERIEL COMMAND; GENERAL LESTER L. LYLES, COMMANDER, AIR FORCE MATERIEL COMMAND; AND VICE ADMIRAL JAMES F. AMERAULT, DEPUTY CHIEF OF NAVAL OPERATIONS General Coburn. Good to see you, sir. Mr. Chairman, members of the subcommittee, I thank you for the invitation to appear here today. I express my appreciation to all the members of the committee for your efforts to improve our business processes. Let me start by saying that we know we have an obligation to be good stewards of every dollar that is given to us and to be good stewards of Army assets. Put another way, we recognize that stewardship of Army assets is every leader's business, and we know that without effective asset accountability and control, that we cannot effectively measure performance, reduce costs, and maintain adequate funds control. In that regard, I can tell you that the Army leadership in consonance with DOD is committed to the Department's financial management improvement plan and that much progress has been made in the last few years. We recognize however that we still have a ways to go and significant initiatives both short term and long term are under way as we move toward the goal of a single integrated financial system. Let me just highlight a couple, and I'll try to do that very quickly. One of the most important initiatives that the Army has under way is a program called the single stock fund. I'll just make a few comments about that, and will not be in consonance with the oral statement I think you have. Currently the Army has two stock funds, a retail fund and a wholesale fund. This means that we have layering and duplication of both financial and logistics processes. Thus we're consolidating these two funds. This consolidation will result in the elimination of multiple ledgers, eliminate multiple billings, multiple points of sale and integrate all the automation systems. Overall, this is an Army-wide change in how we conduct logistics operations and associated financial processes which will allow us to capture costs with greater clarity. It is a fundamental change in the way we do business. Another program that I'll highlight very briefly is the wholesale logistics modernization program, an initiative designed to modernize the army's two largest and most important wholesale logistics systems, we call the commodity commerce standard system and the standard depot system. And again, this is an extremely important initiative for Army. Those are but two. There are others that I won't highlight that are equally important. I'm just going to go right to the summary with your permission and just say that although we have a ways to go, the Army is not just beginning to focus on accountability. We focus on accountability daily and consistently. But notwithstanding all these efforts, however, we acknowledge that we need a single integrated financial management system that will provide commanders and leaders with the financial information they need to most effectively use their resources. Mr. Chairman, that was brief. But I thank you and the committee for your continued support and look forward to your questions. [The prepared statement of General Coburn follows:] [GRAPHIC] [TIFF OMITTED] T0660.095 [GRAPHIC] [TIFF OMITTED] T0660.096 [GRAPHIC] [TIFF OMITTED] T0660.097 [GRAPHIC] [TIFF OMITTED] T0660.098 [GRAPHIC] [TIFF OMITTED] T0660.099 [GRAPHIC] [TIFF OMITTED] T0660.100 Mr. Horn. Thank you very much. Let us now turn to General Lyles. General Lester L. Lyles is the commander of the Air Force materiel command. General Lyles. Mr. Chairman, I appreciate the opportunity to come before this committee today. On April 20th, Mr. Chairman, I assumed command at the Air Force Materiel Command in Dayton, Ohio Wright-Patterson Air Force base. Prior to that time, I served as vice chief of staff of the U.S. Air Force. And in that capacity, I had an opportunity to witness and watch, particularly for the last 2 years as my predecessor, as the commander of AFMC brought a business management perspective to Air Force Materiel Command. He instituted a policy of cost accounting, cost control, and, more importantly, a cost culture to everything we do in Air Force Materiel Command, from research and development to acquisition to logistics to sustainment to actually taking things out of the inventory. Mr. Chairman, I am a big supporter of what General Babbitt started, and my plans are to continue that posture for Air Force Materiel Command. And I've let the entire command know that in the 2 weeks since I've been in charge. Air Force Materiel Command is very, very big business. Accurate and timely financial information is absolutely key to our management and stewardship of the $26.3 billion of appropriated budget and the $13.2 billion of annual working capital fund budget. It's a very complex business. And the complexity of that business makes financial information important, but as you know and as the panel members before me recently stated, it's very, very hard to obtain. Without timely and accurate information, programs like F-22 program and the program directors in charge of it will not have the opportunity to do solid costing and schedule information for managing that program. Our depot maintenance foreman cannot manage their costs. The supply chain manager has difficulty doing his day- to-day inventory management and doing his responsibilities and even things that are seemingly mundane to some people as the lodging manager, will not know whether or not he has met his cost in performance targets and is doing a good job of managing his programs. Mr. Chairman, we know we have imperfect data. That's been stated by the panel before us. You are very well aware of that. That is inevitable as you quoted earlier with the 161 legacy feeder systems and the thousands of interfaces that have to pass critical information. And these interfaces require weeks to run. As a former manager and commander of one of our logistics systems, the logistic centers and depots, I can tell you I would have loved to have the opportunity to close our books in a matter of days as industry does. It takes weeks and sometimes a couple of months to actually do it with the systems we have today. So we're trying to make strides to improve that. There are lots of deficiencies, and we are trying to make corrections of all those deficiencies. I will not go through all the details. You have my draft written report in front of you, the written report that has some descriptions of some of the systems. I'd like to mention just a couple because I think there are major milestones toward trying to achieve the objectives that you, this committee, and others want us to achieve. In the depot maintenance area we're partnering with Defense, with the Air Force audit agency, and with the Navy to implement the depot maintenance, accounting, and production system. DMAPS is the acronym. And this suite of systems will give us the actual cost information and automated billings processes and strengthen the cost controls that we need in order to have CFO compliance. For the supply chain manager, we're trying to mirror commercial practices and bring in commercial practices as much as we possibly can. General Babbitt, my predecessor, back in October when he testified before the Military Readiness Subcommittee talked about some of the things we're doing such as going to moving average costs for inventory accounting rather than the latest acquisition costs to value the inventory, the millions of inventory that we have in our system. You understand what that means. I won't go through a description of it. There is an example given in my written account. We think this is very, very important to us to allow us to get our arms around this very critical function and again to get us to a point where we can be CFO compliant. We've also gone to data warehousing to improve supply management costs visibility and oversight. One system that we call Keystone is helping us to sort of bridge, if you will, between the systems we have for financial accounting and the systems we have for just managing systems and keeping inventories. This is a link between the logistics systems as the previous panel discussed and the financial systems that are very, very important to managing our day-to-day business. We will continue toward making those kinds of strides and bringing on systems like that. One last comment for addressing total ownership costs which is very, very important for the U.S. Air Force and particularly for our major weapons systems. We're using target costing for all of our installation and support activities. This activity base costing methodology is one that we're trying to implement throughout the entire Air Force but particularly in Air Force Materiel Command. As the former vice chief of staff for the Air Force, I was responsible for trying to make activity-based costing a rubric--a mandate for everything we do in the U.S. Air Force whether it's flying airplanes, whether it's preparing systems for deployment, or whether it's developing the major systems we're trying to use to provide capability to our war fighter. This target system, activity-based accounting system is very, very important to us and we're going to continue strides to bring that into the entire Air Force, not just to the materiel function. Mr. Chairman, we've mapped the road toward CFO compliance. We think it's the only thing that we have to do. We think it's extremely important in everything that we do. We've identified the audit findings and material weaknesses and we are trying to address each one of those. We've closed 103 of the 121 audit findings against the U.S. Air Force and all the materiel weaknesses, and we will continue strides to close all of them. In summary, Mr. Chairman, we know we don't have a perfect system. We know we have untimely data. We know we have some systems that provide us occasionally dirty data, but we're making strides and we have the energy to improve that and to use a word that you used earlier, we are fully committed toward these endeavors. We think we're on the right road, and we're proceeding aggressively and we hope responsibly to make those improvements for the U.S. Air Force. I look forward to your questions, Mr. Chairman. Thank you very, very much for inviting me. [The prepared statement of General Lyles follows:] [GRAPHIC] [TIFF OMITTED] T0660.101 [GRAPHIC] [TIFF OMITTED] T0660.102 [GRAPHIC] [TIFF OMITTED] T0660.103 [GRAPHIC] [TIFF OMITTED] T0660.104 [GRAPHIC] [TIFF OMITTED] T0660.105 [GRAPHIC] [TIFF OMITTED] T0660.106 Mr. Horn. Thank you, General. It's very well done. Our last presenter on panel II is Vice Admiral James F. Amerault, the Deputy Chief of Naval Operations for Logistics. Admiral, go ahead. Admiral Amerault. Mr. Chairman, distinguished members of the panel, thank you for the opportunity to appear before you today. Although I don't believe that the bottom line of a balance sheet can tell us that we are ready for war or not, as Navy's Deputy Chief of Naval Operations for Logistics, I do understand completely that reliable and accurate financial information is extremely important in reaching that very readiness. My staff identifies requirements for materiel and services in support of logistics. And they program discrete levels of funding for them in the defense plan. The quality of the financial information on which these actions are based is critical to us getting it right. As Navy's infrastructure manager, I've looked very hard at reducing infrastructure costs in order to modernize and sustain operational readiness. Again, the quality of financial information can be critical to Navy decisionmakers as they consider appropriate actions to reengineer processes to effect cost reductions. In some instances the lack of financial data could cause us to miss an opportunity as Mr. Lynn has said, an extremely large opportunity cost that we can't afford to take appropriate action all together and preclude us from identifying savings or diversion of funds to other war-fighting priorities. It's impossible to determine how much is enough if you don't know how much you have. The idea that what things cost equals what was spent on them has persisted for a very long time. Today's declining budget top lines as well as our accountability to the taxpayers say that time has been too long. I'm ready for your questions, sir. [The prepared statement of Vice Admiral Amerault follows:] [GRAPHIC] [TIFF OMITTED] T0660.107 [GRAPHIC] [TIFF OMITTED] T0660.108 [GRAPHIC] [TIFF OMITTED] T0660.109 Mr. Horn. Thank you very much. Let me ask our friends, the Inspector General and General Accounting Office, they've commented on both the inventory controls and we might as well start with that since we had a few examples. Inspector General and GAO and the audits generally have repeatedly reported on the military service's quote weak controls over inventory including weapons and ammunition. Mr. Steinhoff noted that weak inventory controls can lead to inaccurate records, and inaccurate records can effect supply responsiveness and purchase decisions. Do you agree with that or where are we from the three services? General Coburn, you want to start? General Coburn. Mr. Chairman, I think that as has been stated we do have problems with inventory, but it's a consistent daily battle. We get very concerned whenever we have any shortages of any kind, particularly with weapons. I can tell you that when commanders, even at the company level, change command, they are required to do a total 100 percent inventory of weapons, ammunition, all equipment, and sign off on it as all being there, that they have physically counted and looked at it personally. Notwithstanding that, we continue to have problems with inventory. When I get into it, when I invariably find that you haven't lost anything, it's simply that you have a record keeping--a paperwork problem. So that's what I find time after time. I can also tell you that we get so concerned about it that on occasion we have senior commanders verify the same kind of thing as we have our junior commanders do. So I think that there's lots of room for improvement in the system, but I think that by the same token that we basically know what we've got and that control is really pretty good because there's an awful lot of systems. I can go on and tell you there are a lot of complementing systems as well. It's not just the inventory system. It's also the system where you have--you know, we have service inspections. Some equipment like ammunition, rockets, that kind of thing, you have to not only look at it to make sure it's there but make sure it works. So when you're looking at it to make sure it works, there's a cross-check to make sure the inventory is correct as well. So I guess that's kind of the way I see it. Again, problems but not a perfect system but a system that we continually work at. Mr. Horn. General Lyles. General Lyles. Mr. Chairman, I agree with the comment from General Coburn. It's a very insidious problem because it's one that ultimately affects a lot of different things. Invariably we find in looking at inventory and checking inventory that we haven't lost things but the paperwork is very, very complex and very, very tedious to try to locate exactly where they are or even what the status is of various inventory items. We had examples of that during the air war with Serbia last year, the Kosovo activities. As we tried to track munitions and make sure we knew where they were, what the status of the various munitions, particularly some of our high-valued accurate munitions we needed to prosecute that particular war. The issue is the manpower intensive which is a major, major problem when you consider the downsizing that we're facing today, when you consider that we need to have our young men and women doing other things instead of just tracking paperwork, both at a junior level and a senior level. So the complexities of the systems have made it somewhat of a manpower drain to us. We feel that we have a head on where things ultimately are, that is, we haven't lost things completely but it becomes very, very tedious to try to track them. We need automated systems where we can instantly understand and account for where systems might be. That same thing carries over when we're talking about developing new systems to contractors. The inventory, whether it's government-furnished property or equipment, that we provide to contractors has a similar sort of situation. We can track it but there are like three or four different systems we have to do--look at to do that. It becomes very tedious to us and the contractors. So it is a major problem. Mr. Horn. Admiral Amerault, you want to add to that? Admiral Amerault. Yes, sir. I believe we do a pretty good job of accounting for what we have in inventory, particularly in the field in ships and activity squadrons and detachments and so forth. There are places where this has been a problem. Receipts in some cases have not tracked in both the inventory records and the financial records causing us to not know on the financial side what we've got on the physical inventory side. This is important. Control is a key, generally good but the detail to have the kind of accurate control that one might need on both sides of the ledger, cost dollars, people, and time. I think there's a lot of room for improvement. I think IT systems have come to the point where the investments that we're now making in those will help us close the gap. We don't think this is unimportant. We think it's very important. As I said, it's really hard to tell how much is enough if you don't know how much you've got. We're dedicated to fixing this. I would say that support of our Navy-Marine Corps intranet that we are attempting to invest in and purvey throughout the Navy is an important step. I would urge the committee to support that effort on our behalf. Thanks. Mr. Horn. Mr. Steinhoff, do you agree that progress is being made in the three services or do you see the same thing every year when you go back? Mr. Steinhoff. We continue to find a number of the same underlying problems with the systems. With respect to this area, there's a lot of attention being placed on it. We've seen commitment; but until the underlying systems are fixed, it's going to be very, very difficult. The comment that General Lyles made about using the members of the military to track items and to try to find items, it's a real difficult issue. These are incredibly complicated systems and processes, so complicated it makes no sense. And you don't enter information one time and it goes from system to system. So not only are the logistics systems not integrated or compatible with the financial system, they may not be compatible with each other either. So you've got a real disconnect here, and when something is shipped from point A to point B, it's in transit. You might lose visibility over that item. It's a very difficult issue. I would say there is certainly a commitment. We've seen all the services working toward making changes to reduce their business operations costs to be more efficient, effective; but they all face a major systems challenge which isn't easily overcome. I know I've emphasized this a lot, but there hasn't been great success in government or great success in DOD in systems development, and you're going to have to have common systems in some cases, standard approaches for addressing it, and a lot of reengineering. Mr. Horn. I would think that in an inventory, you've got a way to certainly have an electronic inventory and to what degree do you see that or are we still just putting checks on papers? When I got here, I couldn't believe it that the General Services Administration in its St. Louis operation to which all our district offices can ask for supplies and so forth would automatically send five invoices together. I said this is crazy. We only need one. We've got a Xerox machine. If we need two, and with getting reimbursements let's say in the Capitol's arcane reaches of trying to pay the bills around here, and it was just a waste of trees and papers. How often do you see that in the services or do they have it on electronic inventory? Mr. Lieberman. Mr. Lieberman. There's certainly been a concerted effort over the last few years to implement technology like bar coding. Clearly for many items the solution merely is to bar code them and then let the computer do your recordkeeping and calculations for you. This is a problem that has many different facets because when we talk about inventory, this is a hodgepodge accumulation of items. We're talking about everything from little consumables like screws to large equipment and subassemblies and things like that. Some of it belongs to the services. Some of it belongs to the Defense Logistics Agency. Some is warehoused. Some is actually distributed to using units. Some is outsourced--we hire contractors nowadays often for supply support, and it's their responsibility to keep the inventory. In many cases DOD doesn't maintain anything in stock. We operate on a just-in- time delivery basis. There are, I believe, about 300 separate DOD logistics initiatives and a lot have to do with overcoming this asset visibility problem. In most cases, the answer to whatever the problem is is application of a new technology. So a lot of effort is being put into it, but a lot more needs to be done and then we still have human problems. We still have the guy assigned to do the inventory who doesn't feel like doing it so he looks up the record to see what's supposed to be there and low and behold that's what he reports. Then someone else has to come along, and we've actually had cases like this during these audits this year, and redo the task. The auditors may do another count. The auditors say, hey, none of these quantities match. So we're fighting human fate a little bit. To give on just very mundane example, at one of the defense depots, the people were supposed to wait for the auditors to arrive onsite to do the count because an accepted part of the methodology is the auditors observe part of the count. They thought they would speed things up by going ahead, then just hand the auditors the results when they got there. One of the first times we checked was a type of rubber seal that is inventoried by how many linear feet you have. The record said there should be 396 linear feet on the shelf. The count done previous day said there's 396 linear feet on the shelf. The auditors went and measured. This didn't take rocket science. There were only 200 linear feet on the shelf. So that's the sort of thing that is never going to go away because we're talking about millions of items and thousands of people with varying degrees of responsibility over them, but ultimately the computer is the answer here. Fewer systems, and more diligence paid to the user friendliness of those systems so that we take administrative burden off the troops, are urgently needed. Mr. Horn. Well, it would seem to me that with the services' chiefs telling all of us here we've got too much infrastructure, that what they ought to do is have a competition with various depots and the ones that aren't doing anything that make sense, get rid of those and keep the others. But I think if we had a little competition in those depot things--now with the Naval shipyards I have a few very strong opinions. When you knock out the inefficient shipyards and-- rather you save the inefficient shipyards, and you hurt the ones that threw the money back and never had to repair them a second time. And so that didn't give me much faith, I've got to tell you, in the Navy, in terms of how they make decisions. It seems to me let's get some competition in that. If you've got all these things, you can get rid of those depots. Granted somebody will bark at you here, but I don't think we'll back them up. We also can't--it's a two-way screen. We also cannot--you can get the law through to have another base closure situation, but I just think you've got to let them expand. If they aren't doing anything let's do it another way. I don't know what your need in a geographic sense is needed. A lot of the services forward fund supplies as they should because there's no use going through some of the domestic problems when it ought to be closer to where you need it if you have troops sent there and this kind of thing. What else does the Inspector General and the GAO see they ought to be educated on if they aren't? I'm talking the services now, not you three gentlemen but if--are we missing something somewhere to get that moving so we don't go through this every year. Mr. Steinhoff. I think that the three gentlemen here today described very well the challenge very forthright. I agree with what they said about the challenge. I think that the one area of education, and I maybe beat it too much today, I apologize if I had, that there are no shortcuts in developing systems that must be done with a discipline process. And I feel very strongly that the Department has to look at the business processes and systems together and to put aside some of the stove pipes and barriers and view these as a corporate issue. Our study of world-class finance organizations, the best practices in State governments as well as commercial enterprises, finds that when these types of issues are addressed at the CEO level, at the top level, that a lot of differences between units are put aside. Also it has to be viewed that financial management is providing something of value. I'm not sure across the Federal Government how many managers really understand what financial management can provide. So there's probably a broader educational process, not regarding these gentlemen, but perhaps across the organization. Mr. Lieberman. May I add one thing, Mr. Chairman. These gentlemen really are the business leaders of the Department. They are the closest thing in the Department to chief operating officers and heads of corporations. It's terribly important that they, the users of the financial information, tell the people that design these systems what it is that they need, because if you leave it to the accountants to decide what the managers need, you are going to get some bizarre answers. So we've got to just do everything we can to improve that user- systems designer interface. Mr. Horn. Any other comments, Mr. Steinhoff? Mr. Steinhoff. No. Mr. Horn. General, anything you'd like to get on the record? General Coburn. No, I totally agree, Mr. Chairman, with what's been said. I would just say, though, that I'm heartened by what I see. We've never had visibility in Vietnam. We've been in a lot of excess. We never had it in the Gulf. We opened an awful lot of containers just to see what was inside. I think if you went to Bosnia and Kosovo you'd see it a whole lot better. The way that works the standard is a bar code, and then we put a little card inside the box. It's called an AMS card. It prints out everything that's in the box. The box goes in a container. An RF tag goes on the outside of the container and that goes through fixed level interrogators so we know what we've got along the way. I think that while much remains to be done, there's an awful lot of progress being made in a lot of areas. The key is pulling it all together it seems to me in the one system. Mr. Horn. General Lyles. General Lyles. Two comments, Mr. Chairman, that also give me confidence that we're certainly on the right road and we have the commitment. One is for us in the Air Force we closed two of our five depots. We're now down to three depots. We've aligned work and work packages and inventory from those two that were closed and to the three remaining depots, we have provided additional workloads so that we're almost worked in terms of manning levels at the three depots. This has put an even more of an imperative to make sure we have the right kind of financial accounting systems at those three depots. So for us, this becomes a mandate we have to stay on this course. We have to make sure we have the best, most efficient, most commercial-like systems and best practices that we possibly can and we'll continue that. The second one is I think an even greater demonstration of leadership, support for this area. As I mentioned earlier, I was, prior to taking command of Air Force Materiel Command 3 weeks ago, I was a vice chief of staff of the Air Force, and in that capacity a member of the joint requirements oversight committee, the JROC, and the joint staff. And we within the joint staff, within the JROC over the last year, I dare say we reviewed business operating systems, asset visibility systems, the importance of those systems, the mandate from the chairman of the joint chief of staff, General Shelton, to put emphasis in that area just as much as we reviewed new weapons systems from F-22 to Comanches to what have you. I think the commitment and recognition that this is a major problem goes to the very top of the Department, from the very top of the chairman and joint chief of staff to all the services; and I feel very positive that we have the right sort of focus to continue toward success. Mr. Horn. That's very well said. Admiral. Admiral Amerault. Yes, sir. Mr. Chairman, I think this is an area that we can't afford not to get it right. As I said, top lines are not going up for us. It's critical to us being able to do business and fund the readiness that we need that we get the financial data that helps us make accurate, timely, and good decisions as long, I hope, as we make military sense when we put those systems in place. Obviously a ship full of weapons, operators, and people that make it move doesn't have a whole lot of room for stock clerks and pay clerks. So we need to take advantage of the key that IT gives us today to put in systems that are geared to do the job, do it right, and user friendly to us in a war-time environment. Thank you, sir. Mr. Horn. Well, this has been very enlightening and you give me some optimism that things are going to change, and I'm glad to see that you're all working on that within your three services. It sounds like you've got the GAO and the Inspector General on your side so they are pretty good company to have. And I want to thank you all for coming and this is the staff. I want to thank---- Mr. Walden, we're going to adjourn so I want to introduce you to Mr. Coburn. Mr. Walden is a valued member of this but he couldn't make it this afternoon. So we thank J. Russel George, the staff director and chief counsel and Louise DiBenedetto, the professional staff to my left. Bonnie Heald, director of communications, Brian Sisk, clerk, and Elizabeth Seong and Michael Soon, interns; and on the minority side Trey Henderson is counsel, Jean Gosa, the minority clerk, and Laurie Harris has been our faithful reporter. Thank you and with that we are adjourned. [Whereupon, at 3:50 p.m., the subcommittee was adjourned.] [The prepared statement of Hon. Jim Turner follows:] [GRAPHIC] [TIFF OMITTED] T0660.110 -