[House Hearing, 107 Congress] [From the U.S. Government Publishing Office] THE DEFENSE DEPARTMENT'S ILLEGAL MANIPULATION OF APPROPRIATED FUNDS ======================================================================= HEARING before the SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL MANAGEMENT AND INTERGOVERNMENTAL RELATIONS of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS FIRST SESSION __________ JULY 26, 2001 __________ Serial No. 107-60 __________ 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 78-229 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 2002 ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California CONSTANCE A. MORELLA, Maryland TOM LANTOS, California CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania STEPHEN HORN, California PATSY T. MINK, Hawaii JOHN L. MICA, Florida CAROLYN B. MALONEY, New York THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington, MARK E. SOUDER, Indiana DC JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois DAN MILLER, Florida DANNY K. DAVIS, Illinois DOUG OSE, California JOHN F. TIERNEY, Massachusetts RON LEWIS, Kentucky JIM TURNER, Texas JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois DAVE WELDON, Florida WM. LACY CLAY, Missouri CHRIS CANNON, Utah DIANE E. WATSON, California ADAM H. PUTNAM, Florida ------ ------ C.L. ``BUTCH'' OTTER, Idaho ------ EDWARD L. SCHROCK, Virginia BERNARD SANDERS, Vermont JOHN J. DUNCAN, Tennessee (Independent) Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director James C. Wilson, Chief Counsel Robert A. Briggs, Chief Clerk Phil Schiliro, Minority Staff Director Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations STEPHEN HORN, California, Chairman RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois DAN MILLER, Florida MAJOR R. OWENS, New York DOUG OSE, California PAUL E. KANJORSKI, Pennsylvania ADAM H. PUTNAM, Florida CAROLYN B. MALONEY, New York Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California J. Russell George, Staff Director and Chief Counsel Bonnie Heald, Director of Communications/Professional Staff Member Scott R. Fagan, Clerk Michell Ash, Minority Counsel C O N T E N T S ---------- Page Hearing held on July 26, 2001.................................... 1 Statement of: Steinhoff, Jeffrey C., Managing Director, Financial Management and Assurance, U.S. General Accounting Office; Thomas R. Bloom, Director, Defense Finance and Accounting Service, Department of Defense; Jo Ann Boutelle, Director of Commercial Pay Services, Defense Finance and Accounting Service, Department of Defense, Columbus, OH; Tina W. Jonas, Deputy Under Secretary of Defense for Financial Matters, Department of Defense; and Major General Everett G. Odgers, Comptroller, Headquarters Air Force Materiel Command, Wright Patterson Air Force Base, Ohio............. 11 Letters, statements, etc., submitted for the record by: Bloom, Thomas R., Director, Defense Finance and Accounting Service, Department of Defense, prepared statement of...... 25 Horn, Hon. Stephen, a Representative in Congress from the State of California, prepared statement of................. 3 Jonas, Tina W., Deputy Under Secretary of Defense for Financial Matters, Department of Defense, prepared statement of............................................... 31 Schakowsky, Hon. Janice D., a Representative in Congress from the State of Illinois, prepared statement of............... 9 Steinhoff, Jeffrey C., Managing Director, Financial Management and Assurance, U.S. General Accounting Office, prepared statement of...................................... 15 THE DEFENSE DEPARTMENT'S ILLEGAL MANIPULATION OF APPROPRIATED FUNDS ---------- THURSDAY, JULY 26, 2001 House of Representatives, Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, Committee on Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 10 a.m., in room 2154, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding. Present: Representatives Horn, Schakowsky, and Owens. Staff present: J. Russell George, staff director and chief counsel; Bonnie Heald, director of communications; Henry Wray, senior counsel; Scott Fagan, assistant to the subcommittee; Chris Barkley, staff assistant; Davidson Hulfish, Samantha Archey, Fred Ephraim, Fariha Khaliq, and Christopher Armato; interns; Michelle Ash, minority counsel; and Jean Gosa, minority assistant clerk. Mr. Horn. The Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations will come to order. Congress spends enormous time and effort each year enacting appropriations. However, we spend too little time looking at what actually happens to those appropriations once they are implemented. Too often we just assume that congressional intent is carried out. Today's hearing will show that this is not always true. We will examine and receive today a report from the General Accounting Office, and the General Accounting Office, as we all know, is headed by a very able Comptroller General, and when we refer to the report, it will be GAO, not always General Accounting Office. This report is on how the Department of Defense manipulates the balances of appropriations years after the accounts have been closed in order to free up money beyond the limits that Congress has imposed. Although this deals with an arcane subject, the GAO report provides dramatic proof that the mischief can often be found in the details. GAO auditors found that, in 1 year alone, the Defense Department came up with $615 million in potential extra funding through what the General Accounting Office terms ``illegal or otherwise improper'' adjustments to old appropriations balances. If these findings represent a typical year, the Department of Defense may have used those bogus ``adjustments'' to conjure up billions of dollars in back-door spending. This is not a new issue. Long ago, Congress suspected that the Department of Defense was abusing old appropriations. Indeed, legislation initiated by the Committee on Government Reform's predecessor, the Committee on Government Operations, was enacted in 1990 to stop abuses. However, as this report clearly demonstrates, the Department of Defense has failed to comply with the law, and the Department's manipulation of old appropriations balances has continued largely unabated. Today's hearing will examine three issues: First, how did these abuses happen? General Accounting Office auditors found improprieties that involved flagrant violations of basic legal requirements and financial management practices that ignore principles taught in Accounting 101. To cite just one example, the Department of Defense shifted $38 million in payment charges to appropriations that had not even been enacted into law at the time the payments were made. We have invited the key managers who were involved in these transactions to testify today. We intend to get to the bottom of this one way or the other. Second, we want to know why these abuses persist. The General Accounting Office report shows that the Department of Defense uses ridiculously complex accounting codes that serve no apparent purpose and invite data entry errors. For example, the Department requires separate payment codes for bubble gum, Tootsie Rolls, and balloons that were purchased for a child care center party. In a 1997 report, the General Accounting Office stated that it was ``imperative'' to fix the Defense Department's ``complex and convoluted [contract payment] process.'' The new GAO report states that these problems, ``for the most part, still exist today.'' In fact, the Department of Defense uses systems, policies, and practices that virtually have built-in features that cause violations of the law. The Department of Defense has known about some of these defects in the systems over the years, and no one has really done very much to correct them. These abuses have to end. Finally, we want to examine how these abuses can be stopped once and for all. You have got a new administration. You can start from ground zero and move through all of these systems. The GAO offers some good recommendations, but its past reports have fallen on deaf ears. There are encouraging signs that the new administration is intent on resolving the Department of Defense's daunting financial management problems, and it needs to follow through on those with concrete actions. In closing, I want to acknowledge that this GAO report is the result of a joint request of this subcommittee and the House Budget Committee, chaired by a very able person, Representative Jim Nussle of the Budget Committee, who couldn't be with us today. However, he has submitted a written statement that, without objection, will be in the hearing at this point in the record. [The prepared statement of Hon. Stephen Horn follows:] [GRAPHIC] [TIFF OMITTED] T8229.001 [GRAPHIC] [TIFF OMITTED] T8229.002 [GRAPHIC] [TIFF OMITTED] T8229.003 [GRAPHIC] [TIFF OMITTED] T8229.004 Mr. Horn. I welcome our witnesses today and look forward to your testimony. I now yield for an opening statement to the ranking member, Ms. Schakowsky, the gentlewoman from Illinois. Ms. Schakowsky. Mr. Chairman, I thank you for holding this hearing. However, I must say that I am disappointed that we have to meet once again to review why the Department of Defense cannot get its financial house in order. At our hearing on the consolidated financial statement on March 30th of this year, we learned that most agencies received ``clean'' or ``qualified'' audit opinions, while DOD received a disclaimer. DOD's books were so fraught with error that an audit could not even be accomplished. Then at our financial management oversight hearing on May 8, 2001, we heard that DOD was the biggest culprit of financial mismanagement. Today we find that DOD is violating the law. This is not to mention the two hearings in March 2001 of the Subcommittee on National Security, Veterans Affairs, and International Relations, on which I serve, on ``Vulnerabilities to Waste, Fraud and Abuse,'' which found that DOD was the most vulnerable of the Federal agencies. Or the hearings held by you, Mr. Chairman, and your Democratic predecessors for well over a decade chronicling the serious financial mismanagement at DOD. Today we will hear from the General Accounting Office that DOD is illegally or improperly using its closed appropriations accounts. Specifically concerned with DOD abuse, Congress passed a law, as the chairman mentioned, in 1990 that states that appropriations accounts close 5 years after the last year in which the money was available for obligation. Yet, DOD seems to have ignored this law and has continued to use these closed accounts. Let me just mention one such illegal use. In 1999, DOD adjusted a 1992 account for $79 million. Unfortunately, that 1992 account closed in 1998 and never should have been touched. The law states that if DOD needed to make a payment on the 1992 account, it should have spent 1999 dollars, not 1992 dollars that were no longer available. This blatant abuse of appropriations accounts is just one more example of DOD's longstanding financial management problem. Until DOD establishes the necessary systems, procedures, policies, and controls, and takes necessary managerial actions, we will continue to hear about such missteps. I don't know what it is going to take to give top-level DOD personnel a wakeup call. GAO has explained that DOD's prospects for the future do not look favorable. In GAO's High-Risk Series Update, they state: ``After having performed hundreds of reviews of major weapons systems over the last 20 years, we have seen many of the same problems recur--cost increase, schedule delays, and performance shortfalls. These problems have proven resistant to reform in part because underlying incentives have not changed.'' Mr. Chairman, because of its sheer size and the magnitude of money involved, one would think that DOD would have the most updated systems and controls in place, and yet, it has the worst. I can only hope that DOD will not have to stand before this committee a fourth time this year because of financial mismanagement. I further hope that all Members of the House will join me in opposing the Department of Defense's budget. Until DOD gets its financial house in order, it should not be rewarded with an increase. Thank you. [The prepared statement of Hon. Janice D. Schakowsky follows:] [GRAPHIC] [TIFF OMITTED] T8229.005 [GRAPHIC] [TIFF OMITTED] T8229.006 Mr. Horn. I thank you, and we will now move to the witnesses. I want to let you know a little bit of how this subcommittee works. One is, it is an investigating subcommittee. We will ask you to approve and affirm the oath for not only the ones at the table, but the assistants behind the ones at that table. The clerk will take down who are the assistants behind, so we don't have to go give the oath to somebody whispering in your ear, and we will just do it once. When your name is called, the statement, the written statement, automatically goes into the record. Don't worry about it; it just goes in, and what we would like you to do is give us a summary of that statement. The staff and some of us have read through all that, and we would like to get sort of the essence of these problems and then we would like to have a dialog of the members on both sides of the aisle to see if we can get to solving some of these problems with you. [Witnesses sworn.] Mr. Horn. We have 1, 11 sworn in. We will start with our friends from the General Accounting Office, Mr. Jeffrey Steinhoff, the Managing Director, Financial Management and Assurance, of the U.S. General Accounting Office. Mr. Steinhoff. STATEMENTS OF JEFFREY C. STEINHOFF, MANAGING DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE; THOMAS R. BLOOM, DIRECTOR, DEFENSE FINANCE AND ACCOUNTING SERVICE, DEPARTMENT OF DEFENSE; JO ANN BOUTELLE, DIRECTOR OF COMMERCIAL PAY SERVICES, DEFENSE FINANCE AND ACCOUNTING SERVICE, DEPARTMENT OF DEFENSE, COLUMBUS, OH; TINA W. JONAS, DEPUTY UNDER SECRETARY OF DEFENSE FOR FINANCIAL MATTERS, DEPARTMENT OF DEFENSE; AND MAJOR GENERAL EVERETT G. ODGERS, COMPTROLLER, HEADQUARTERS AIR FORCE MATERIEL COMMAND, WRIGHT PATTERSON AIR FORCE BASE, OHIO Mr. Steinhoff. Mr. Chairman, Ranking Member Schakowsky, I'm pleased to be here today to discuss DOD's use of canceled appropriations under the 1990 Account Closing Act. At the outset I want to make clear that the problems I will highlight today predate the current DOD Comptroller and his team, who have pledged to deal with the serious financial management problems that have plagued DOD for decades. The 1990 act resulted because of serious abuses in the use of old, expired appropriations, principally by DOD. Under the 1990 act, once an appropriation has been expired for 5 years, it closes, and all remaining balances are canceled. It cannot be used for any purpose. Agencies may in only limited circumstances adjust accounting records for closed accounts--to correct clear-cut accounting errors. But, frankly, that should not happen very often, which, unfortunately is a big problem in DOD and largely why we're here today. From the enactment of the 1990 law through the end of fiscal year 1999, DOD reopened 333 closed accounts valued at $26 billion, and between fiscal year 1997 and fiscal year 2000 made adjustments totaling about $10 billion to those accounts. By comparison, all other Federal agencies combined reopened only 21 closed accounts valued at only $5 million. We audited $2.2 billion, or over 80 percent, of DOD's reported $2.7 billion in fiscal year 2000 adjustments to closed accounts. The fact that DOD made $2.7 billion of adjustments in fiscal year 2000 alone shows a lack of adequate control over appropriations, which is one of the most fundamental financial management requirements. Compounding this problem, DOD had not put in place the systems, controls, and managerial attention needed to properly comply with the 1990 law. As a result, $615 million of the $2.2 billion we audited, or 28 percent, were illegal or otherwise improper. For $108 million, the appropriation had already canceled when the disbursement was made, a clear violation of the Account Closing Act. For $38 million, the appropriation charge had not yet been enacted when the disbursement was made, which violates the Account Closing Act as well as other appropriations law. For another $364 million, the payments had originally been charged to correct appropriations and, therefore, did not meet the limited criteria to adjust a closed account. And, yet, for another $105 million, there was not sufficient documentation to support the adjustment that was made. Those were improper as well. Now let me share several examples of what we found. Ms. Schakowsky mentioned one earlier that involved the $79 million that was associated with the C-17. In this case the account had closed 4 months before the payment was made, and by moving that payment back to a closed account, it was a clear violation of the 1990 act. It was, therefore, illegal. For the second example, I've got a posterboard here that tries to explain this. These transactions are very complex. This is simpler than some of the others. When you collect money related to a canceled appropriation, you have a recovery. Let's say you overpaid a contractor and it led to recovery of funds related to a closed account. You are supposed to return those moneys to the Treasury Department. They go into what's called miscellaneous receipts. They then are under congressional control. That money is not available for agency use. In this case DOD had a recovery related to a closed appropriation account. They bypassed that appropriation account and credited that to an open account, meaning that was money that was free to spend. In another case, in order to pay a $685,000 invoice, DOD made $590 million of adjustments to closed accounts, $210 million of which did not meet the criteria for adjusting a closed account. I mention this because you see the magnitude of the accounting transactions that go on. They had a payment they couldn't make to an open account, and to try to reconcile that payment, they had to go through a very complex, convoluted process that resulted in manyfold more in terms of adjustments than the initial transaction. We found that DOD became aware in 1996 that there were deficiencies in its account reconciliation system that could result in violations of the Account Closing Act. Although at the time DOD projected that the cost to fix the system was only $24,460, nothing was done until May 2001, and only as a result of our review. In addition, DOD contracting officials issued contract modifications that directed that oldest funds be used first, a practice that was followed regardless of whether the appropriation had canceled, and it was intended to use unspent funds from canceled appropriations. Overall, our audit results provide another reminder of how broken DOD's management systems are today and why 8 of GAO's 23 high-risk areas pertain to DOD. I'm using the term management systems to decribe the problem, not financial management systems, because 80 percent of the information that Mr. Bloom and his team need to do their job comes from non-accounting systems. So we're talking about an overall management system issue. Our report contains a number of recommendations, including the need to immediately reverse the $615 million of adjustments that violated the Account Closing Act. In the short-term there must be accounting discipline to avoid similar problems going forward and personal accountability for any future breakdowns. The buck must clearly stop somewhere. An effective monitoring and accountability system must be in place. For the long-term--and this is the big challenge--there is an overarching need for fundamental financial management reform as part of a total transformation of DOD's overall business systems and operations. I am pleased that the Secretary and the Comptroller have stated their intention to do so and that plans are being developed to transform DOD's financial management systems. Ms. Jonas, here today, is really charged with achieving that. We need to look at the systems, policies, and procedures. I've got a couple of other posterboards here that I think I used last May, when I had the privilege of testifying before the subcommittee, and that the chairman alluded to in his opening remarks. You have a very complex set of accounting codes in DOD, but making it even tougher is that first two digits shown on the poster board under the caption ``A-C-R-N.'' You have multiple ACRNs on many contracts. One example in our report mentioned a $2.1 million payment that required the contractor to submit billing that had 487 pages in order to spread the $2.1 million to 267 ACRNs. It's just a very difficult job for the Comptroller's operation to perform. It's a convoluted, broken process. The second posterboard I have here is the infamous spider chart that speaks volumes about DOD's contract and vendor pay system. This is DOD's chart. I want to make that clear. This is what they're saying is the environment they're trying to move away from. I think recognizing a problem is very important, and here they clearly recognize it. I'll point to that one system up in the top lefthand corner, MOCAS. That's the system that was involved heavily in a lot of the transactions that we reviewed as part of this audit for the subcommittee. And to show you the challenge, the first letter, ``M,'' represents mechanization. That was a high-tech word in around 1960-61, when this system came on line. So DOD is working with a system that's close to 40 years old. Maybe it never worked that well in the beginning. There's no real documentation for it, and it's just a difficult challenge. It's a world-class issue that they're facing today, and we're hopeful there will be, what I call, total transformation. The Comptroller General has spoken about this a couple of times, and DOD is going to have to look at the entire business process from stem to stern. Mr. Chairman, Ms. Schakowsky, this concludes my summary remarks. I will be pleased, when we get to the question-and- answer, to respond to any questions you have. [Note.--The GAO report entitled, ``Canceled DOD Appropriations, $615 Million of Illegal or Otherwise Improper Adjustments,'' GAO-01-697, may be found in subcommittee files, or by calling (202) 512-6000.] [The prepared statement of Mr. Steinhoff follows:] [GRAPHIC] [TIFF OMITTED] T8229.007 [GRAPHIC] [TIFF OMITTED] T8229.008 [GRAPHIC] [TIFF OMITTED] T8229.009 [GRAPHIC] [TIFF OMITTED] T8229.010 [GRAPHIC] [TIFF OMITTED] T8229.011 [GRAPHIC] [TIFF OMITTED] T8229.012 [GRAPHIC] [TIFF OMITTED] T8229.013 [GRAPHIC] [TIFF OMITTED] T8229.014 Mr. Horn. I thank the gentleman. We will now move through the panel and hold questions until we complete the presentations. Our next witness is Thomas R. Bloom, the Director, Defense Financial and Accounting Service of the Department of Defense. Mr. Bloom. Mr. Bloom. Good morning, Mr. Chairman and Congresswoman Schakowsky. My name is Tom Bloom and I'm the Director of the Defense Finance and Accounting Service. With me is JoAnn Boutelle, who is Director of Commercial Pay Services for DFAS in Columbus. I welcome this opportunity to discuss with you the complex process of contract reconciliation and the GAO's recent review of adjustments made with that process. DFAS has made some significant mistakes, and we recognize and generally agree with GAO that there have been, and to a lesser degree still are, procedural, systemic weaknesses in our contract reconciliation process, these shortcomings in the recording of adjustments to accounts that may be improper or illegal, as noted by the GAO in their report. We are taking specific, positive actions to ensure that, in partnership with our customers, we do the right things in the contract pay and reconciliation process. DFAS makes various types of payments on large, complex, multiyear contracts. DFAS-Columbus disbursed approximately $280 billion on contracts during the 1997-2000 fiscal year timeframe. The payments are recorded against various appropriations in fiscal years that fund the specific contract. Contract closure, changes in liquidation rates, or revisions to overhead rates are just a few examples of acquisition business practices that result in adjustments to previous payments. The contract file and payment history are subsequently reconciled. The duration of many of these contracts is extensive and more information becomes available during the life of those contracts. At the time of reconciliation the payment is validated against information current at the time of reconciliation. It must be noted that often new or additional information is used during the reconciliation process that was not available at the time of the original payment. Adjustments are made as a result of the reconciliation process to ensure that the payments match the contract terms and conditions. Reconciliations are performed by DFAS, other DOD personnel, and support contractors. DFAS-Columbus adjusted approximately $25 billion in disbursements during the 1997-2000 fiscal year timeframe that resulted from contract reconciliations. We agree with the GAO recommendations for DFAS. Let me now address the specific actions and steps we at DFAS have taken to ensure accounting adjustments made during the reconciliation process are sound. First, we have revised our procedures to ensure that adjustments are posted only to appropriations that are available at the time that a payment was originally made. Second, we have conducted mandatory training for personnel involved in the reconciliation process to ensure that they clearly understand not only the adjustments procedures, but the appropriations law as well. Third, we have changed our contract reconciliation system to install changes that recognize and prohibit adjustments to fiscal year appropriations that have been canceled or not yet enacted at the time of the original payment. One of the systems is up and running as of May; the other system's change will be finished in September. Fourth, we're directing our accounting personnel to post all adjustments regardless of appropriation balances and take the appropriate action to report apparent violations of the Antideficiency Act to the military service or DOD agency involved. We will work cooperatively with our DOD and service customers to provide them the necessary information for their review or investigations, as appropriate. These actions we have put in place will give us a check- and-balance process to ensure that adjustments resulting from the reconciliation process meet sound and prudent financial management practices. We are monitoring compliance with these requirements to ensure that invalid adjustments are identified and reversed, and we're taking a very aggressive stance in DFAS. When we find problems, we're addressing them very quickly. For instance, recently, we found some duplicate payments that were made. We immediately shut down the system and will not start it back up until we have discovered why this is happening and make sure that it doesn't happen in the future. We recognize the importance to our customers and to the American taxpayer of having reliable, credible financial information, and this obviously includes the proper recording of adjustments resulting from reconciliation actions on contracts. Mr. Chairman and Congresswoman Schakowsky, I assure you that the military and civilian employees of DFAS are accountable for their actions and, as their leader, I am the most accountable. We seek only to provide the best service. Our uniformed members and American taxpayers deserve nothing less. I assure you that we will make the necessary adjustments to our financial records and systems, and we have already examined our processes and put into place preventative measures that we will continually monitor. That concludes my remarks. Ms. Boutelle and I will be happy to answer any questions you all might have. Thank you. [The prepared statement of Mr. Bloom follows:] [GRAPHIC] [TIFF OMITTED] T8229.015 [GRAPHIC] [TIFF OMITTED] T8229.016 [GRAPHIC] [TIFF OMITTED] T8229.017 [GRAPHIC] [TIFF OMITTED] T8229.018 [GRAPHIC] [TIFF OMITTED] T8229.019 Mr. Horn. We thank you, and we will now move on to Ms. Boutelle, who is the Director, Commercial Pay Services, Defense Finance and Accounting Service. Now are you simply backing Mr. Bloom up or---- Ms. Boutelle. Yes, sir. Mr. Horn. You didn't have a written statement? Ms. Boutelle. No, sir. Mr. Horn. OK. We will have our next witness then, and that is Ms. Jonas. She is the Deputy Under Secretary of Defense for Financial Management, Tina W. Jonas. Please proceed. Ms. Jonas. Thank you, Mr. Chairman and Ranking Member Schakowsky. I appreciate the opportunity to come before you and discuss financial management reform within the Department of Defense, and specifically the recent General Accounting Office report on canceled DOD appropriations. Let me tell you that the Secretary of Defense and the Under Secretary of Defense Comptroller and I realize that the Department's financial management weaknesses are a very serious matter that must be addressed through comprehensive reform. Fundamental changes are required to reassure Congress and the American people that we are good stewards of the resources entrusted to us, and this is a priority of the Secretary, the Comptroller, and it is my highest priority. In order to accomplish some of those changes, the Secretary recently established a Department-wide financial management modernization program to develop a DOD enterprise architecture. When implemented, that architecture will provide a blueprint that will guide the building of an integrated financial management system that will help prevent inappropriate financial transactions. The fiscal year 2002 DOD budget includes a request for funding to begin this critical modernization effort, and we hope that the Congress will support that effort. With regard to the specific concerns in the GAO report, I must emphasize that the Department's policies are consistent with current statutes. Obviously, if the policies had been adhered to, the issues addressed in the GAO report would not have occurred. Unfortunately, they did occur, and we are performing a high-level review Department-wide to determine what processes and policies need to be changed, and this will include, as Tom has already mentioned, an internal review of the specific processes at the Department's DFAS accounting service, and where we've identified current weaknesses, we are moving out to correct them. For example, we have provided additional training to 200 DFAS personnel, and we are making required policy changes, modifying automated systems, and will take individual personnel actions where appropriate. In closing, Mr. Chairman, let me again stress that the Secretary and the Comptroller take these financial management weaknesses very seriously and are committed to aggressive financial management reform. We look forward to continuing to work with this committee and with other interested Members of Congress and look forward to your support of our reform efforts, and would be happy to answer any further questions. [The prepared statement of Ms. Jonas follows:] [GRAPHIC] [TIFF OMITTED] T8229.020 [GRAPHIC] [TIFF OMITTED] T8229.021 [GRAPHIC] [TIFF OMITTED] T8229.022 Mr. Horn. We thank you, and now we will start in on the questioning. I would like to ask just a few questions of Mr. Steinhoff. Your report recommends the Defense Department, in essence immediately, reverse the illegal and improper adjustments that you identified. The report also says the Defense Department must ``immediately fix'' the system contract modification problems and inadequate policies and procedures identified in the report and which contribute to the abuses. How long has the Department been aware of your findings and recommendations? Mr. Steinhoff. As we performed our work, we did provide information to the Department regarding the 268 transactions audited, of which we questioned 154. So the times will vary from 3 to 6 to 8 months for those. Our draft report, with our full portfolio of recommendations, was provided to the Department about 2 months ago. Mr. Horn. What is the GAO's idea of months and half-years and all the rest? Because we are moving into another cycle now. What kind of expectations should we have from the Department of Defense on how fast they clean up this situation? Mr. Steinhoff. I think you must view this from both the long-and short-term perspective. In the short-term, I think it's very important that DOD put in place what I call a system of accountability. They're still going to have that overall poor system environment I mentioned in my opening statement. But what DOD has to do in the short-term is to very effectively carry out the range of actions things Mr. Bloom mentioned. There needs to be strict accountability and oversight during this short-term until there's clear proof that things are under control, that people are actually effectively doing these things. I would recommend things like approvals at various levels for a large dollar adjustment transaction; the $79 million transaction for example. There also has to be periodic monitoring. There has to be constant reinforcement. It can't be told to people once or twice what is expected. In addition, it will be important to have periodic reporting in this initial stage, both internally and to the Congress. I don't mean in perpetuity. We don't need another report, but at least until there's some feeling this is under control, reporting information such as the amounts and nature of adjustments, the status of actions to address underlying problems, and information on interim enhancements would enhance accountability. Another important control would be periodic audit. I know that we've been asked by this subcommittee and the House Budget Committee to do a followup review for fiscal year 2001, and we will review the actions DOD has taken to address our recommendations. But I think maybe periodic audit by the IG after that is warranted, until you find out that this is really stabilized. Continuing congressional oversight is very, very important, knowing that this is important to Congress is a catalyst for action. Mr. Horn. Mr. Bloom, how much work has been done on this? When did you first see the GAO recommendations, and what have you done about it? Mr. Bloom. Well, I first was briefed on the GAO recommendations on April 12. I believe that there were members of my staff who had been briefed prior to that. When I was briefed, I was obviously concerned and immediately asked my staff what had we done and what were we doing at that point. At that point we had already implemented a fair number of manual controls--some of the approvals that Mr. Steinhoff talked about, trying to really pinpoint accountability on the manual process. They were also working at that time on systems' fixes, and I don't want to say that systems' can fix everything; they can't. You have to have good people, diligent people, doing the right things, trained people. So we took steps to train our folks in appropriations law. We've been bookkeepers for too long and not accountants, and many of our folks have the title of accountant and we've got to earn that and we've got to act like accountants. So we're training our people. We're professionalizing our workforce. We're adding the systems changes and adding accountability. Mr. Horn. Could you tell me to what degree is the Columbus operation of your group--we know that for about 6 years that they have always been one of the biggest headaches we have seen. Now to what degree have you straightened out the DFAS- Columbus? You have referred to it, and I believe GAO referred to it. Mr. Bloom. I think you're absolutely right, Columbus has been a problem for years. One of the steps that I took soon after taking this job, I think it was February 2000, I changed the scope of responsibility, essentially broke that huge, that mammoth organization out there into two pieces, and then I changed executives. At that time JoAnn Boutelle came on board. She had actually been a deputy for a short time before that, but the most significant part, the contract pay part, this part we put JoAnn in charge. We think that's a significant positive thing. It's now the size that can be managed, and I believe I've got the right executive and she's moving to make sure that we've got the right managers. Mr. Horn. I now ask my ranking member here for 6 minutes or so. We will alternate, and then Major Owens will be next. Ms. Schakowsky. Thank you, Mr. Chairman. I have to tell you this infuriates me. I think the American people, if they really knew about this, would be infuriated as well. In 1996 we eliminated an entire welfare program which amounted to about $13 billion a year total for the whole program, Aid to Families with Dependent Children, because of perceived problems with that program. And, yet, if I am understanding correctly, since 1990, $26 billion has been allocated from these closed accounts. Is that right, Mr. Steinhoff? Mr. Steinhoff. Actually, that was the value of the accounts opened by DOD. I don't think there's a precise number. For the last 4 years there's been $10 billion. Ms. Schakowsky. OK. Mr. Steinhoff. But it's a very large number. Ms. Schakowsky. It's a very large number. Mr. Steinhoff. It's a very large number. Ms. Schakowsky. I mean, imagine, we have these huge debates about the National Endowment for the Arts. $100 million total is what are in budgets like that. So I think this is very, very significant. Besides, when we consider how this money could be spent even within DOD--and we are fighting to provide our men and women in uniform with adequate living standards, etc.--this is positively infuriating. What I am trying to understand is how rapidly we are moving toward correcting this. My understanding now is that the law has been broken repeatedly, but a violation of the act includes not sending over a report that a violation has occurred. Now the GAO sent its draft report to DOD 2 months ago, and I should note that DOD failed to respond to the GAO draft. Has the DOD yet sent a violation report to the President and the Congress? Has anyone been disciplined due to findings in the GAO report? Has anyone been disciplined under the Antideficiency Act since 1990, when the law was passed? Ms. Jonas. Ranking Member Schakowsky, you're referring to the Antideficiency Act and whether or not there was a potential violation of that. There have been violations that have been reported. I have the Deputy CFO, Nelson Toye, with me. He may be able to have the number in his head. But, to date right now, we do not know specifically whether an ADA violation occurred. Part of what the Comptroller has ordered is an internal review of both the DFAS personnel and the Air Force personnel specifically with respect to that $79 million transaction. We're very concerned about that. Obviously, I alluded to making adjustments to or taking appropriate personnel actions. If there's any indication that an ADA violation occurred, we will get that to OMB, to the President, to the Congress, as soon as we know about it. So we're working to understand what happened on the transaction. The Air Force may want to comment on their specific investigation to date on the $79 million, but we're very concerned, as you are, about potential violation. Ms. Schakowsky. But a violation report has not been sent yet because it is still being---- Ms. Jonas. Not to my knowledge, no. I have only been here a couple of months. Ms. Schakowsky. And I am only in my second term, but all of us have to take responsibility---- Ms. Jonas. Agree. Ms. Schakowsky [continuing]. To the American taxpayers for things that have happened, even if it may not have been under our watch exactly. And in reference to that, you say in your testimony that we are going to develop a new Department of Defense enterprise architecture and that it will help prevent inappropriate financial transactions. I want to tell you something: Unless we are told something better than we think this will help to prevent these kinds of illegal--not just inappropriate but now we are hearing illegal--transactions, that is just not going to make it. It seems to me that you have to promise better than trying to help prevent these kinds of things. Ms. Jonas. I think the word ``help'' there is--Jeffrey has responded to this; this is a multifaceted problem. Systems can do so much, and we need to make appropriate enhancements, modernize these. We mentioned the MOCAS system that is over 40 years old. What has not happened in the past is there's never been money devoted to actually modernizing these systems that are antiquated and cause the multiple transactions that increase the likelihood of errors, etc. But, to your other point, we intend to take swift, aggressive action, you know, hold our managers accountable. This is also a people, procedures, and policy issue. We fully agree with you; it's the systems--you can't blame everything on the systems. So we have to take a multifaceted approach to this financial management problem, and we intend to do so. Ms. Schakowsky. The GAO in the High-Risk Series Update that I had quoted says that, ``These problems have proven resistant to reform, in part, because underlying incentives''-- incentives--``have not been changed.'' So what are the incentives that need to change? Because it feels to me like that gets to more than systems, but maybe even a culture that needs to be changed. I don't know. Mr. Steinhoff. A lot of the challenge that the Department faces is a cultural challenge. DOD is largely a stovepiped operation with each service operating in their own way. You have stovepipes within services. You have OSD that has a different set of responsibilities. It's very rare, if ever, they ever do something in a joint manner. That accounting code I showed you earlier on the poster board was for one service. For the other two services, it's a different accounting code. There has really been no one focal point that is in charge for broad reform. There are certain elements that the Comptroller General, David Walker, has outlined that are very, very key. Transformation has to come from the top and, as I said earlier, we're most encouraged by at least the words so far from the Secretary. It has to come from the top. It has to include re-engineering, not just fixing what's wrong now, because the basic system is broken, but re-engineering the system, thinking outside the box, breaking down those stovepipes, changing the way folks behave on a day-to-day basis, and having something like a board of directors who would make corporate-type decisions over how DOD is going to operate in the financial acquisition personnel, and logistics worlds, all the way down the line. When I spoke earlier about 8 of the 23 high-risk areas, I could have focused on just the one, financial management, but I view these as all being intertwined. It's one set of management processes, and they haven't been viewed in that way in the past. I'm hopeful they're being viewed that way today. Mr. Horn. The gentleman from New York, Major Owens. Mr. Owens. Thank you very much, Mr. Chairman. Is there now going to be--well, let me just backtrack. Does West Point have any courses in accounting? There is some place where you draw on your personnel, personnel capable of handling this kind of mega-accounting job. Is that part of your system? Do you have a place to draw the human beings from who are going to be the accountants and the managers of the system? Mr. Bloom. We have an aggressive training approach, and we're implementing an aggressive recruitment approach. Mr. Owens. Well, what does that mean? You get your supply of bookkeepers and accountants from the same place as the rest of the marketplace? Mr. Bloom. Yes. Mr. Owens. But there's no place where you are training people and spending money for grants and really preparing them for this kind of accounting? Mr. Bloom. We actually are. We have a significant training budget, and we do do a significant amount of training in-house. I think last year we spent over $50 million training our folks. So we're focusing on it. We need to bring our folks up not just one notch, but probably two or three notches, through education, through training, and through better recruitment of folks. Mr. Owens. Are you comfortable that there is now a pipeline being established which will guarantee that you will have the people you need? Are you competing with private industry in a way that you are always going to have amateurs and new people; in terms of the personnel problems, they will always be there because there is no definitive pipeline that you have control of a set of incentives? What is the top salary for an accountant? Mr. Bloom. At a GS-13 level, I believe it's in the $75,000, $65,000-$75,000, depending on what part of the country---- Mr. Owens. And you are competing with Wall Street and everyone else who has---- Mr. Bloom. And it is tough, but, you know, there are folks who like the idea of serving their country and doing the right thing. We haven't exploited that to the extent that we can and will. Mr. Owens. Well, we have been in business for a long time, haven't we? Mr. Bloom. We have. Mr. Owens. Billions and billions of dollars; it is not a small agency. In previous years this committee has dealt with small agencies like the Department of Agriculture, which had $14 billion in uncollected loans out there, but their budget is nothing like yours. When you make a mistake, a 1 percent set of mistakes is huge, and on and on it goes. My problem is that we have not approached the problem with maximum assigned high priority to it: the training, the development of a system, like a few things here computers could have done. Now you have done it, I hope. There are certain things you can do with computers. I am sure you will do all those things or have done them, but I did hear somebody say that the system had not been funded properly. Can we assume it has been funded properly now to do the things you have to do, which are obvious, with computers, the things that are fixed and not human errors, not personnel-related? You have done those things now? Ms. Jonas. Well, the modifications that Tom was discussing with respect to these particular transactions, I think part of that has been completed. The additional part will be complete by September 30. The type of system architecture that I was discussing in my testimony is a really long-term problem, and it has to do with making the systems--you saw the current environment chart that GAO put up, and I actually think that expresses very well the kind of difficult challenge we have. But integrating these systems so that we don't have the multiple transactions and the potential for error, that's the long-term phase and that's why we've included funding in the budget to try to do that integrated architecture. They call it an architecture, a blueprint for how systems and transactions will work. Mr. Owens. Mr. Steinhoff, do these agencies talk to each other about these problems at all? Four years ago, I think there were reports that the CIA had lost in its accounting system $2 billion. A few weeks after that, they said, no, it's not $2 billion; it's $4 billion. Part of that related to the satellite reconnaissance systems and things which overlap with the Department of Defense. I assume that the CIA went to work correcting their problem 4 years ago, and the Department of Agriculture some time ago, when we had them here. Maybe they went to work, I hope, to correct their problem. Is there some kind of Federal across-the-board attention to the fact that management of finances ought to have a high priority and there ought to be things that are done on an ongoing basis systematic about all Federal agencies? Mr. Steinhoff. There are several mechanisms in place today. There's a chief financial officers' council, which was established under the CFO Act, where the CFO's meet I think roughly once a month. They also have various committees. There's the Joint Financial Management Improvement Program, which I now chair, which meets on governmentwide issues. You have the group in OMB, the Controller who under the CFO Act heads the Office of Federal Financial Management that spearheads financial management across the board. If you look at solving the kind of problems faced in DOD, I believe they are unique. Their setup is unique. The type of environment they're in is very, very unique. But there are those forums for sharing. I also will expand a little bit on the earlier issue you raised on human capital. That's a real crisis today. You got right to the nexus of one of the most important management challenges. Across government, in every area, this is something that will perhaps be cataclysmic at some point in time. Just talking about the accounting area--and this is a problem not just in government, but for private sector accounting--the number of accounting students at the college level has dropped by about 40 percent in the last couple of years. Kids really don't get excited about being a career accountant, I guess, and they're looking to more exciting things in life. This is becoming a real crisis. Mr. Owens. There is a really big, serious issue about a government initiative to guarantee you have the people to do the recordkeeping---- Mr. Steinhoff. Yes. Mr. Owens [continuing]. Financial recordkeeping. I once headed an agency for New York City which had a mere $80 million a year to spend. Three-quarters of the problems and the crises that I was confronting from time to time related to fiscal recordkeeping, you know. Mr. Steinhoff. Yes. Mr. Owens. So do we need--it is far-fetched to say at West Point--do we need some major federally funded effort if not to establish our own academy, but to guarantee that there are incentives, scholarships, fellowships, and ways to get a ready supply of people who can manage these kinds of things? Because, as you said before, the whole welfare program could have run on your errors. Needless to say--the CIA lost track of $4 billion--what we could have done with that. Mr. Steinhoff. You basically have to deal with a range of human capital initiatives that are now being considered. People have to use their existing authorities better than they do today. In addition, I think the Congress is considering a number of actions with respect to human capital. Also, Mr. Bloom may or may not agree here, but earlier he mentioned bookkeepers versus accountants. To the extent DOD can turn around its system it can move away from having as many bookkeepers or as many people trying to reconcile transactions. When one of every $3 of transactions is correcting or adjusting a previous transaction, when you have systems that require you to enter a transaction multiple times, and when you're entering literally millions of transactions unnecessarily, you end up having just an army of accounting clerks. Mr. Owens. Yes. Mr. Steinhoff. And you want to move toward fewer of those and many more people with high-end accounting and financial analysis skills, so that you're making the necessary analysis. Mr. Owens. My time is up, but I want to thank you, Mr. Chairman, for calling this hearing. Again, you are right on target in terms of many basic needs we have in terms of management. Thank you. Mr. Horn. I thank the gentleman. Let me get into this. We have some very able people here as executives with a very good background. I am going to start with you, Mr. Bloom. You have been the Chief Financial Officer at both the Department of Commerce and General Services Administration. What is the difference you see between those two agencies and what you are confronted with in the Department of Defense, and what could you tell us on that? The reason I ask that is, when we got into the Y2K bit back in 1996, 1997, 1998, and all that, I also got into some of the accounting. I said at the time that, if Secretary Forrestal, the first Secretary of Defense, had just wiped out every accounting system he had there and get a system that would work--and how many accounting operations do you have, how many different ones? Maybe Ms. Jonas can help us on that. Mr. Bloom. Well, let me start with, the first question is the comparison between the Department of Commerce and GSA and what we have at DOD. There are a couple of striking things that, frankly, caught me by surprise when I got here 2 years ago. You can talk about the size and you can read about how big DOD is, but until you've actually experienced it, this is a monolith. This is huge. So neither GSA or Commerce were anywhere near the size and complexity. The other thing is that some of the contracts that we're dealing with go back to the seventies, the early seventies and the mid-seventies. So we're dealing with very long-term, very large projects. The longer something exists, it's almost geometric how errors can occur, and we keep these contracts going for years and years. You know, as a former Inspector General, I kind of believe that if a contract is over 5 years, you ought to rewrite it. Now that causes the acquisition community heartache, I'm sure, because I'm looking at it from just an accounting standpoint. It might be interesting to hear what they would have to say about something like that. The other thing, since the contracts are so big and so long, are progress payments. We make progress payments along the way. That makes it increasingly more difficult and complex. I'm not trying to make excuses, sir, but it does make it more complex, and the sheer size and the stovepipes. You know Jeff Steinhoff mentioned the stovepipes. It isn't just the Air Force or the Navy who do things differently from one another; we do things differently in different parts of those services. So the question that you asked, how many kinds of different accounting groups are there out there, while there is one DFAS and we took a bold step 11 years ago to form DFAS, that was really just half of it. There are literally--and I guess I'd ask Nelson Toye--hundreds of other accounting functions out there in the services, in the defense agencies, and lots of room for consolidation and standardization. Ms. Jonas. Mr. Chairman, I would just add, the systems which we called non-financial feeder systems, which incorporate all the service systems that they use for inventory and every other system, I think there are about 200 that we have identified so far, and we're not positive that that's the bottom of the barrel. In fact, one of the efforts that we're currently looking at is getting a better inventory of these systems. It is enormous. It is just going to be a huge problem. We have to have the information. The data that flows from those non-financial feeder systems must be accurate as well. Tom's just got the financial end of it, but the data that flows into it has to be accurate in order to have integrity. I think we have our hands full, and that's why we had to go to a blueprint, or what they call an enterprise architecture, to just get a handle on what are we talking about in terms of the systems that are required to give the kind of trustworthy data that we need. Our budget request is about $100 million for 2002 to begin this. So it's a fairly sizable amount that the Secretary has set aside to try to address this very serious problem. Mr. Horn. Well, I think, as everybody knows, we have a real problem in terms of human infrastructure, not just the machines, and we're losing thousands of people from the services, from the civilian side. I would hope that in this administration every single political appointee goes to some college so that they can make a speech as to the opportunities that one has. You never get the chance that you have in the services. They have more responsibility and they are responsible for millions of dollars worth of equipment and all the rest. We ought to make that challenge in some of the people that are graduated, both undergraduates and graduates. I would hope we would work that system and try to say, you know, 10,000 people are leaving; we need 20,000 maybe or 15,000 to solve some of this. Ms. Jonas. Dr. Zakheim has been out, he has his doctorate and he is a very strong supporter of education, and we will take every opportunity, Mr. Chairman, Jeff has raised, and the Comptroller General has raised, with Secretary of Defense Rumsfeld many of these issues--in fact, did so, I think, last Friday. So we are very attentive to the issues that GAO is raising, and we're glad that they are raising them. It gives us the opportunity to try to address them. Mr. Horn. You are one of us on Capitol Hill. So how did it shock you when you went over there---- Ms. Jonas. Yes, you're right, Mr. Chairman. Mr. Horn [continuing]. Since you were handling appropriations? Ms. Jonas. I worked on the health care accounts for Mr. Young and that was a shock. They had similar issues and problems. So I was somewhat aware of what I was walking into. Mr. Horn. Well, you should know all the ins and outs then. Ms. Jonas. Not all. Mr. Horn. And maybe in a couple more months you'll know all of the Defense Department's ins and outs. So what is the best way we can say to solve this problem now? Is it just putting people on it, Mr. Bloom, or what? What do you think? How can we get a plan moving to solve this thing? Mr. Bloom. We need a holistic approach. I grew up in Detroit, and I was a goalie in hockey as a kid. My job at Defense is kind of as a goalie. I am the last line of defense. But that isn't--we need to get the whole team working together. We need to get the forwards and the centers and the defensemen, and that's the acquisition community; it's the FM community throughout DOD. We all need to be working together on this. We haven't done a great job, frankly, of working together and taking the holistic approach. Certainly this report is going to help get our attention and force us to do that, to work more as a team, so that we're not relying on just one part of the team to make sure that the wrong things don't happen. Mr. Horn. Well, if you don't mind, General, I would like General Odgers to come forward so we can get a feeling for what goes on in the Air Force and how that relates to the overall defense situation. You've got a lot of talented people that go into the Air Force. I just wondered, what do you see as the kind of talent you are getting to help you in accounting situations and general housekeeping and administration, and whether your people coming out of ROTC, or whatever, can you get talented people to deal with that? General Odgers. Mr. Chairman, Ms. Schakowsky, I am Major General Everett Odgers, and I am the Director of Financial Management and Comptroller for Air Force Materiel Command--in lay terms, I'm the Chief Financial Officer. We're the parent command for the centers where most of these activities took place that are detailed in the GAO report. We do have a very difficult time recruiting and retaining qualified financial management personnel. We have teams we send out to the universities annually to recruit people, bring them into what we call our PALACE Acquire Program, which is a 3-year training program, to take their accounting and financial management degrees and grow them into useful Federal Government employees for our accounting and financial purposes. That program works very well, but it clearly does not bring on nearly the people that we need. As we work through all of the workforce issues that we have within the Department of Defense and in the Air Force, we continue to strive to find qualified people. It's an extremely difficult process. We are in competition with private industry, and it is very stiff competition. In many cases they win at some of the bigger and more prestigious universities where we would like to draw talent from, sir. Mr. Horn. Do you lose a lot of people after your 2 or 3 years of helping them through college and this kind of thing? General Odgers. Our experience in the more lucrative employment markets, such as the area around Hanscom Air Force Base, Boston, MA, and Los Angeles near the Space and Missile Center, and areas such as that, we are in stiff competition and we tend to lose these people either to contractors who are working for us in some way or to private industry, sir. Mr. Horn. What can we do about it, anything else? General Odgers. We have worked with the Air Force, our command has, in workforce-shaping initiatives to find ways to better recruit people, through legislation or other activities, to offer bonuses to people as we recruit them so we can become more competitive with private industry and draw the talent that we need, sir. Mr. Horn. Let me move back to Mr. Bloom. I want to focus on following two specific cases. One adjustment charged fiscal year 1998 and 1999 appropriations for $21 million in payments that were made before these appropriations had been enacted into law. This is an obvious violation of the law and common sense. I wonder what you can tell me about this and the $21 million, and where is it now? Mr. Bloom. It was just a mistake. JoAnn may be able to give more details. No excuse, sir. Mr. Horn. Ms. Boutelle is the Director, Commercial Pay Services, Defense Finance and Accounting Service. Ms. Boutelle. Yes, sir, and we receive adjustments from the services as well as from the staff that we have at Columbus performing reconciliations and from contractors. The particular one you're addressing, the $21 million, came in from the Air Force, and I would have to defer to General Odgers for any specifics on those adjustments. I can tell you that, where DFAS was wrong was that when those adjustments did come in and fed through our contract reconciliation system, we did not have an edit in place to catch them and bring them to someone's attention. That is one of the system fixes that we are working on. Mr. Horn. General, what about that $21 million in payments that were made before these appropriations had been enacted into law? General Odgers. Sir, clearly, the actions that were taken, the recommendations that were made by the Air Force people for those transactions were in error. We are in the process of correcting those entries, and as we do that, we go through looking at all of the ancillary accounts that are involved in this to determine whether there are any problems that will arise such as a negative account where we would have to go into an Antideficiency Act investigation. Clearly, we were in error. The internal controls that were in place, the management actions that should have taken place, did not occur, sir, and we need to fix that. Mr. Horn. Now is that going to be fixed within the Air Force or is it going to be fixed within the Department of Defense? General Odgers. We obviously are going to work with the Department of Defense, but on the Air Force's part we recognize that we need to take some very rapid action. We are very concerned. We consider this a significant setback in our work toward CFO compliance, as you've had hearings on this subject in prior years, sir. We have launched an intensive training program for our program managers, financial management people, contracting people, the contractors who work with us in this area, for our reconciliation agents, the people who sign off on many of the modifications. We want to go out and give them intensive training modeled after the New Start process that we went through last year after we ran into some very serious problems there. So we plan on going out, launching that program in the month of August, to give them refresher training in accounting for appropriations, particularly where canceled year funds are involved, to assure everyone understands the law and how the law operates. In the longer term we need to work with the Defense Acquisition University to try to get more accounting and fiscal law information into their courses for the financial managers, program managers, and acquisition people, and we are establishing, working with Mr. Speer, who is the Principal Assistant Deputy Secretary of the Air Force for Financial Management, limits for approval of these types of transactions, where up to $1 million the program manager has to sign off on them; from $1 million to $10 million, the center or installation comptroller will have to sign off; $10 million to $25 million comes to my office at the major command, and $25 million and above will have to come to the Air Force. This is a process that we have for some other things. It works very well, and we think putting this in place for some period of time at least will get the system back under control, so that we will know what is happening out there, sir. Mr. Horn. In terms of the professionals and the support service on the financial side of the Air Force, how many do you have that are civilian? How many are Air Force? General Odgers. Uniformed members, sir? Mr. Horn. Yes. General Odgers. In my command--and I can only speak for Air Force Materiel Command; I do represent about 28 percent of the total Air Force--35 percent of the civilian population, and 15 percent of the military population, sir. Mr. Horn. Now on the military side, if you have somebody that is really lousing things up, you can either not promote them or you can do a number of things. General Odgers. Correct. Mr. Horn. But you don't really have much power on the civilian side, I would guess. General Odgers. Sir, if in the process of investigating a transaction or some other activity that took place, if, in fact, it pointed to an impropriety or someone creating some illegal act, then there are administrative procedures that we certainly can take. The commander has the prerogative to deal with these people through administrative punishment up to and including dismissal from the service, sir, if it's serious enough. Mr. Horn. Well, would you say that you have better sanctions with the uniformed services than you have with the non-uniformed? General Odgers. I would not agree with that totally, if I might, sir, phrase it that way. Mr. Horn. Sure. General Odgers. We have equal ability to investigate any impropriety that occurs. Obviously, the military justice system is significantly different than it is on the civil service side, but both of those provide us the opportunity to prosecute people if, in fact, that is necessary--much swifter and quicker perhaps on the military side. Mr. Horn. When I go through the military side, I often remember that it used to be master sergeants and chief petty officers that could have easily fixed that up, and if they didn't, they had usually two books going anyhow. So whatever happened to those people? [Laughter.] General Odgers. I don't know, sir. We've lost a lot of them, I know that. Mr. Horn. Yes. Don't you wish we had them, right? General Odgers. Yes, sir. Mr. Horn. OK, one more example now, Mr. Bloom: The second adjustment resulted in shifting to other accounts $210 million in payments that had been charged correctly in the first place. In other words, this adjustment managed to convert $210 million of the correct charges into accounting errors. How are we going to handle that one? Mr. Bloom. Well, again, in the short-run, we need to look at every one of those transactions and figure out why we did it, why it got by us. In the long-run, having better managers, having better trained people and the systems enhancements--I mean, not only were these unnecessary, but they were costly. In other words, it costs us more money to do the wrong thing, and from an efficiency standpoint that was bad. It's really the same tack. We just need to be better accountants. We need to do a better job, sir. Mr. Horn. I am going to yield the rest of the questions to the gentlewoman from Illinois, Ms. Schakowsky. Ms. Schakowsky. Thank you, Mr. Chairman. Unfortunately, I think I have more questions than time, but I do want to make a couple of points. Ms. Jonas, your predecessor reported, I guess to the Armed Services Committee, or it was said to them that the DOD can't account for $40 to $50 million each and every day. That is a lot of money. You talked about $50 million for training in a year. That is a lot of money, too. But to not be able to account for that much money is completely and totally unacceptable. I look at that spiderweb and it doesn't surprise me that people, regardless of pay, might be reluctant to step into the middle of that. I mean, who would want to be in a systems environment that looks anything like that? Yes, maybe you could put that up. I mean, I don't know what salary would encourage me to step into that. The way I deal with spiderwebs is I knock them out. And trapped in that spiderweb are billions and billions of taxpayer dollars right there. Now that is an insult to the spider no doubt, and in this case probably a lot of spiders that are in there creating that web, but, clearly, we need to do that. But the question--and everyone acknowledges that, but it's always in--I don't know what you call that part of speech--``We are working toward,'' ``We are in the process of.'' If we were to call you back in 3 months, what could we expect is going to be different from what has happened? Anyone can answer that. Ms. Boutelle. Well, I can say from the DFAS-Columbus systems problem that there were--what--35 of the transactions that were in that illegal category, where we adjusted to an appropriation that was canceled at the time or not enacted. The system changes, we put in one that went in in May and that has fixed the backward move. Now there's a few little problems with it that we're working to resolve. And then the fix to---- Ms. Schakowsky. That is a scary thought, but OK, fix them. Ms. Boutelle. We are. We are. Ms. Schakowsky. Those little mistakes end up being $21 million here and $40 million there. Ms. Boutelle. Absolutely. Then the fix for the moving- forward adjustments, that's the one that the developers are programming and will be testing and have that in place by the end of September. So these 35 transactions that got through will be caught and will not be allowed to go through. So in 3 months we will definitely be able to tell you those fixes are in the system. The other thing that we're doing, we have trained a lot of the reconcilers that are government employees as well as contractors on appropriation law and on the specifics of these situations. We plan on having the rest of them trained by the end of September, so that they will also be knowledgeable. Hopefully, then, with the system fixes as well as the knowledge, we won't find reoccurrences of these problems. General Odgers. Ma'am, if I might add to that? Ms. Schakowsky. Yes. General Odgers. Working with Ms. Boutelle, the actions that we're putting in place, I would like to believe that once we get the process in place where these actions have to be certified by people above the program office, she won't see very many of them and her systems won't have to catch them. Ms. Schakowsky. And that will be when? General Odgers. That will be immediately. So 3 months of now, the number of transactions that she sees that are improper should not exist. I mean, they will not be there. Ms. Schakowsky. Mr. Steinhoff. Mr. Steinhoff. I think in 3 months you'll see a number of the short term actions that I referred to in my opening statement to deal with this immediate problem that led to the illegal and improper transactions. Your spiderweb will still be alive and well. It will be alive and well for a number of years. This is a world-class challenge. Ms. Jonas mentioned the systems architecture for all the business systems in Defense. I think you're talking somewhere on the order of 7 years or more before they're able to really get their systems in shape. That's just a very rough guesstimate. Ms. Schakowsky. Ms. Jonas, how does that number sound to you? Ms. Jonas. The Secretary of Defense wants us to have this done in 6 years. Ms. Schakowsky. OK. Ms. Jonas. But I don't know that's possible, but we must strive to make clear near-term--within, you know, less than a decade--processes. Mr. Steinhoff. And the holistic approach that Mr. Bloom mentioned before is really what is needed because, if you look back over time, the road in Defense is littered with billions and billions of dollars of systems development efforts that were well-intended going in with high hopes, and they just didn't work real well. In part it was because they were done in a stovepiped manner without a clear set of blueprints for how they fit in with something else. So this transformation that the Secretary is beginning is very important, and the control over those appropriations for systems and the wise spending of the moneys will be very important to make his 6-year goal. Ms. Schakowsky. And I think, Mr. Chairman, your efforts to continually engage in this kind of oversight activity is equally important to make sure that it is clear to everyone that someone is watching. Thank you very much, Mr. Chairman. Mr. Horn. Well, thank you and we appreciate the questions you have asked, and we will make sure you ask a lot of others in the months to come. I might add that wonderful chart of the General Accounting Office could conceivably come out of the papers of science and administration and Grykunus' chart, for those of you that read those books in the thirties, forties, and fifties, but it is a geometric move and it is very difficult to take those and figure them out. We've got to find a way to stop this practice, and I hope that the people from the Department of Defense will really focus on this because I am going to hold a hearing about 3 months from now on this and see how far you have come. Closed accounts should be closed accounts. If any one of us wrote bad checks, they would bounce. If we intentionally wrote those bad checks, we would land in jail. That apparently doesn't apply to the government's largest agency. Over and over, Congress receives reports of departments and agencies violating Federal financial management laws and nothing seems to happen. Likewise, nothing changes. There is another law on the books, as Ms. Jonas notes, called the Antideficiency Act, and it is not enforced often. It is time to re-examine them now. We will send you some questions we would like for both the minority and the majority. So we would like to know where you are, and then 3 months from now we will be back here. I want to thank all of you for coming. I want to thank our staff: J. Russell George, right behind me, the staff director/ chief counsel; Bonnie Heald, next to him, director of communications; Henry Wray, on my left, senior counsel in putting this together; Scott Fagan, assistant to the subcommittee; Chris Barkley, staff assistant; Davidson Hulfish, Samantha Archey, and Fred Ephraim, interns; and a hard-working young intern, Fariha--it is Fariha's last day with the subcommittee as an intern. Where is she? There you are. Thank you. She is one of our best interns. And then Christopher Armato, another intern. And the minority staff: Michelle Ash, the minority counsel; Jean Gosa, minority clerk. And Geri Lyda, the court reporter. Thank you very much, and we are adjourned for 3 months. [Whereupon, at 11:30 a.m., the subcommittee was adjourned.] [Additional information submitted for the hearing record follows:] [GRAPHIC] [TIFF OMITTED] T8229.023 [GRAPHIC] [TIFF OMITTED] T8229.024 [GRAPHIC] [TIFF OMITTED] T8229.025 [GRAPHIC] [TIFF OMITTED] T8229.026 [GRAPHIC] [TIFF OMITTED] T8229.027 [GRAPHIC] [TIFF OMITTED] T8229.028 [GRAPHIC] [TIFF OMITTED] T8229.029 [GRAPHIC] [TIFF OMITTED] T8229.030