[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
                                 ______

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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       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:]
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    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.
    [The prepared statement of Mr. Steinhoff follows:]
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    Mr. Horn. 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:]
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    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:]
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    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:]
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    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:]
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    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
    
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