The Department of Defense is amidst the most comprehensive reform of financial management (FM) systems and practices in its history. These reform efforts are driven by two pressing needs: first, the need to overcome decades-old problems in financial management systems and procedures; and second, the need to lower administrative costs by fundamentally redesigning the Department's fiscal operations.
Last year's Annual Report highlighted FM problems confronting DoD -- billions of dollars in disbursements not matched to specific obligations, overpayments to defense contractors, Antideficiency Act violations, DoD accounts with excess disbursements, issuance of paychecks to soldiers after their discharge, and so forth. In spite of rigorous efforts to keep the Department's FM systems operating effectively, DoD leaders have recognized that these systems require major overhaul.
UNDERLYING CAUSES OF DOD FINANCIAL MANAGEMENT PROBLEMS
DoD's manifold FM failures reflect an antiquated bureaucratic organizational structure coping unsuccessfully with the complexities of modern government and business. During the past 50 years, the Services and other DoD organizations developed their own operating procedures and accounting systems to accomplish their missions. In 1991, DoD had some 250 finance and accounting systems, most incompatible with each other. As the missions undertaken by the Department became more complicated, DoD organizations were forced to interact with each other, revealing a lack of DoD-wide standards for data and procedures, among other things. Rather than redesigning its organization or standardizing its FM systems, the Department developed ever more complicated business practices, which attempted to preserve the individual bureaucratic organizations while coping with more demanding operating requirements.
For example, it takes about a hundred paper transactions among a dozen organizations to make a progress payment on a complex weapon system. Within DoD, different organizations use different and inconsistent approaches to do similar tasks. They use computer programs, for example, with different names and concepts to deal with parallel problems. All these forces produced business practices that were complex, slow, and error-prone. No matter how skilled the people operating them, the Department's FM systems and processes were inherently handicapped in their efficiency and effectiveness.
The Department over the years has worsened its operations by adopting unacceptable operating procedures to deal with problems. For example, in response to legitimate complaints by business that the government was slow in paying its bills, DoD responded by adopting flawed business practices, which provided for payment of bills without adequately checking underlying accounting records for availability of funds. In sum, the Department confronts decades-old problems deeply grounded in the bureaucratic history and operating practices of a complex, multifaceted organization.
BLUEPRINT FOR REFORM
Understanding the underlying causes of the problems is only the starting point for reform. During the past year, the Department has developed a blueprint to reengineer its business practices to eliminate these long-standing problems. Some of the elements of the reform blueprint predate this Administration, while many are new this year. The key elements of the blueprint are discussed below.
Consolidate Finance and Accounting Operations
The establishment of the Defense Finance and Accounting Service (DFAS) in 1991 was a giant step forward for the streamlining of DoD's financial systems, with DFAS becoming a pivotal agent for key financial management reforms. A major DoD streamlining milestone was last year's announcement of 26 sites selected for consolidation of DFAS operations. This will curtail the time consumed by the vast challenge of coordinating the work of nearly 300 original sites. Streamlining operations into fewer locations also will better enable DFAS to focus its energies on the standardization and modernization of systems and procedures. Finally, this streamlining should result in a substantial savings in both people and money.
Consolidate Finance and Accounting Systems
DoD FM systems are of two types: (1) finance systems, for processing payments to DoD personnel/organizations and contractors; and (2) accounting systems, for accumulating and recording operating and capital expenses as well as appropriations, revenues, and other receipts. In 1991 when DFAS was established, DoD had some 250 of these systems.
Consolidating and standardizing finance systems under DFAS is well underway. Three years ago the Department had 18 separate military payroll systems; today there are 11 -- and by 1996, the number will be down to two or three. For payroll operations for DoD civilians, the new Defense Civilian Pay System (DCPS) will soon provide the Department with a standard, fully automated system that will improve productivity, reduce support costs, and provide standard data to interrelated accounting and personnel systems. By the end of FY 1996, almost all DoD civilians will be paid through DCPS. When fully implemented, DCPS will result in the elimination of 18 civilian pay systems and the closure of 353 payroll offices.
Greater obstacles and less rapid progress are likely for the streamlining of DoD accounting systems. Most of the Department's 163 major accounting systems were designed to meet only the unique requirements of their users. Moreover, these systems must continue to operate as consolidation takes place. Nonetheless, the Department finally has a cogent, integrated plan for modernizing its accounting systems.
Establish Pre-validation for Disbursements
One of the actions DoD is taking to prevent future instances of unmatched disbursements is to require the validation of proposed payments with the corresponding obligation data in official accounting systems prior to making payments. Beginning in July 1995, DoD will require such validations for all payments over $5 million. In October 1995, that threshold will drop to include all payments over $1 million. In addition, the Department is developing plans to expand this validation requirement to cover all payments.
Reengineer DoD Business Practices
Much of DoD's support activity involves interaction between financial and nonfinancial systems. One important example is the interaction between the nonfinancial acquisition processes by which weapons are developed and the financial systems that process payments to the private contractors from whom those weapons are procured.
The chart below shows the flow of approximately one hundred transactions typically required for payment incident to a procurement contract. From the chart, one can appreciate the complexity of contract payments, given that each type of organization depicted uses automated systems designed to serve its needs, rather than to facilitate interaction with others. For example, data and information coming into one of these organizations generally must be entered manually, because it cannot be easily passed from one automated system to another.
The following chart depicts critical initiatives in DoD's interim strategy for simplifying and improving the processing of procurement payments for contracts administered by the Defense Contract Management Command (DCMC.) (Much of the dollar value in unmatched contract disbursements comes from DCMC-administered contracts.)
On the chart, the dashed lines show the improvement resulting from electronic data interchange (EDI) using national standards (ANSI X12EDI transaction sets). This use of EDI will substantially cut down on manual data entry and greatly improve the data integrity between the contract payment and accounting systems. The solid lines show electronic data transfers using internal DoD transaction formats.
Beyond this interim strategy, DoD plans greater use of standardized EDI transactions and further simplification of the interactions between offices involved in contract payments.
The simplification of business practices also is the goal of two initiatives to expand the use of commercial credit cards:
Strengthen Internal Controls
The Department is working vigorously to strengthen its internal FM controls and prevent fraud. As detailed above, reengineering the contract payments process and other business practices offers the greatest promise for minimizing discrepancies in DoD disbursements. However, until that long-term reform is fully in place, DoD is taking interim steps to reduce disbursement discrepancies. To that end DFAS, in conjunction with DoD components, established a project to reduce the current backlog of unmatched disbursements. This effort has focused not only on clearing existing unmatched transactions, but also on improving existing procedures and systems, which are the systemic causes of this serious problem. Through the joint efforts of all parties involved, unmatched disbursements have been cut in half. In 1995, the project team should reach its new goal of cutting unmatched disbursements in half again. Other actions to reduce disbursement discrepancies include new policies aimed at terminating disbursements in overdisbursed accounts and requiring that a disbursement be matched to an obligation before actual payment is made, as discussed above.
To help address a systemic cause of unmatched disbursements, the Acquisition and Financial Management Panel was established. The panel is co-chaired by the Under Secretary of Defense (Comptroller) and the Principal Deputy Under Secretary of Defense (Acquisition and Technology). It includes the Under Secretaries of the Army, Navy, and Air Force, as well as the DFAS Director and the Commander of the Defense Contract Management Command, a component of the Defense Logistics Agency. It focuses primarily on improving the interconnectivity between finance and acquisition systems.
The Department is being proactive in both detecting fraud as well as preventing it from occurring in the first place. In each case where fraudulent actions have been discovered, the Department has reviewed the circumstances that permitted such actions, thoroughly assessed changes needed to preclude such fraud from recurring, and disseminated that information along with corrective guidance to all activities performing similar functions.
The security of information on DoD's automated networks continues to be a major priority. The Department's information systems are vulnerable to unobserved alteration and lack audit trails sufficient to identify system penetrators. To remedy these and related weaknesses, the Department has taken strong actions to ensure compliance with existing security procedures; created an active fraud detection and prevention unit, as part of ongoing efforts to minimize fraudulent attack against DoD's financial assets; formed a task force to analyze computer security weaknesses; and initiated actions to streamline and clarify security policies and procedures.
Another way in which DoD is strengthening internal controls is to improve the collection of debts, for example, from separating servicemembers. DFAS has implemented its state-of-the-art Defense Debt Management System (DDMS), which is resulting in more timely deposit of payments, reduced work needed to bring about collections, and increased attention to debt avoidance. Over the next three years, these and other measures should cut in half the amount of new debts within the Department and markedly improve debt collections.
Improve Management Incentives
Financial systems can create strong incentives to influence management actions, and DoD systems need to do this better. In the past for example, DoD operational leaders neither knew nor could determine the total cost of their purchasing options, such as whether to repair or replace a damaged piece of equipment. Consequently, leaders made decisions that minimized the cost to their organization, even though those decisions may have driven up the total cost to the Department.
The previous Administration undertook actions to correct this problem when they created the Defense Business Operations Fund (DBOF). DBOF seeks to ensure that all relevant costs are included in prices used by DoD leaders in deciding between options for logistics and other support services.
Problems with DBOF have been caused primarily by flawed implementation. To solve those problems, the Department undertook a thorough review of the Fund, resulting in a DBOF Improvement Plan released in September 1993. The Plan endorses the original DBOF goal: to provide better information for decisionmakers through total cost visibility and full cost recovery. It also outlines 56 actions necessary to improve the operation and management (O&M) of the fund in four categories: (1) accountability and control, (2) structure, (3) policies and procedures, and (4) financial systems. The Department has now completed nearly all these actions.
Significant reforms include the establishment of a DBOF Corporate Board to oversee DBOF improvement and operation, improved policies and procedures, and selection of migratory finance and accounting systems to support DBOF operations. The DBOF Corporate Board has ensured full DoD-component participation and support of the improvement efforts. The combination of better policy guidance and fewer, more responsive financial management systems should ensure better information and financial management in DoD business operations as well as reduce costs.
Advance Building Blocks for Long-Term Reform
The standardization of data, definitions, and concepts is critical to long-term DoD plans to consolidate its FM systems and optimize compatibility between them as well as with nonfinancial systems. Moreover, accumulation of data can be valid only if it comes from organizations with common bases for determining that data.
DoD's 250-plus finance and accounting systems have been managing some 100,000 different data elements. Detailed data modeling has shown that DoD financial operations could be conducted with fewer than 1,000 carefully designed standard data elements. During the past year, most of these standard data elements were defined. These now will be used in future DoD efforts to streamline and improve its financial processes.
Data standardization is critical as DoD consolidates its financial systems and moves toward sharing common processes and data under an open systems environment. It also facilitates long-term DoD improvements in the management of data resources, by taking advantage of technological advances that allow managing data as a shared commodity -- separate from the programs and applications using the data.
As part of its standardization effort, the Department has two important initiatives for its accounting systems:
SUPPORTING INITIATIVES
Chief Financial Officers Act
The Chief Financial Officers (CFO) Act of 1990 has helped the Department to identify and better focus on its FM deficiencies and define the standards by which progress can be measured. The Department currently submits audited financial statements for the Army, Air Force, and DBOF each year as required under the CFO Act. The next major task for the Department is the incorporation of the Navy under this Act. While compliance with the Act and other statutory requirements is motivation for reform, the Department's long-term reforms reach beyond that goal.
Consolidation of Financial Management Regulations
One cause of DoD's FM problems has been that policies often differ from one DoD component to another. This condition exists partly because, when the Under Secretary of Defense (Comptroller) issues policy guidance, that guidance is not always uniformly disseminated by DoD components. Instead, they frequently interpret the guidance and publish internal implementing procedures. Too often, different component interpretations result in the inconsistent application of DoD policies.
In response to this situation, the Comptroller is issuing a single DoD Financial Management Regulation for use on a DoD-wide basis. The regulation promulgates guidance involving the Department's appropriated funds, DBOF, and other revolving funds. The initial effort -- the consolidation, clarification, and expansion (where applicable) of Comptroller guidance -- is well underway. In the next phase, individual DoD component regulations will be eliminated or incorporated into the consolidated DoD regulation, as appropriate. This effort is expected to eliminate over 70,000 pages of sometimes conflicting guidance and provide the Department with standard policies and procedures.
Federal Managers' Financial Integrity Act
In FY 1994 the Department initiated major modifications to its implementation of the Federal Managers' Financial Integrity Act (FMFIA). The goal was to make the best possible use of the annual FMFIA process to diagnose and solve deficiencies in DoD internal financial controls.
The new plan requires senior functional managers in OSD to identify systemic internal control deficiencies plaguing the entire Department. In addition to complying with FMFIA requirements, this will prioritize reform efforts of the Services, defense agencies, and unified commands, who execute the operational internal controls of the Department. At the same time, the Department's FMFIA process will continue to encourage DoD components to identify and resolve internal control problems that are unique to them.
The FY 1994 DoD Annual Statement of Assurance reflects the implementation of this new approach. In doing so, the statement is brief and concise in its reporting. Rather than a multitude of individual problems reported independently by various DoD components, the statement discloses the Department's systemic control weaknesses and the corresponding supporting initiatives of the DoD components. This initiative also reflects more substantial management improvement activities that are ongoing throughout the Department; for example, acquisition reform, business process reengineering, and financial management reform.
Government Performance and Results Act
As part of its efforts to improve management incentives, DoD is developing performance measures for DoD activities and linking these measures to budget decisions as envisioned by the Government Performance and Results Act (GPRA) of 1993. Performance reporting will supplement financial reporting and performance information required by the Chief Financial Officers Act, provide a framework for management improvement, and support the allocation of resources through performance budgeting.
The GPRA also requires identification of output and outcome measurement in budget formulation and management. In exchange for this accountability, the law promotes increased managerial flexibility. The Under Secretary of Defense (Comptroller) is responsible for facilitating, coordinating, and overseeing the Department's implementation of GPRA. Within DoD, implementation of GPRA is well underway and includes:
National Performance Review
The Administration's 1993 National Performance Review recommended modernizing federal financial management processes and services, making them more efficient and business-like, and improving their reliability. Following the Review's recommendations, DoD is working to reduce or eliminate -- where appropriate -- the financial restrictions associated with appropriated accounts, so that financial managers have greater flexibility to set priorities and solve funding problems at the lowest suitable operating level.
Other Review-related actions involve DoD's O&M accounts, such as using O&M funds to incur family housing O&M-type costs and structuring the FY 1996 budget to fund noncentrally managed procurement in the O&M account. The latter action should help local installation managers avoid pitfalls in DoD's acquisition process: redundancy, multiple layers of controls, and unnecessary constraints.
Oversight of DoD Contracts
DoD actions to streamline and improve the procurement process include the reduction of contract audit oversight at DoD contractors with good business systems. One example involves the Defense Contract Audit Agency (DCAA) and DCMC working together with contractor executives to strengthen contractor internal control systems. Better contractor controls should reduce unallowable costs initially charged to DoD and lessen the need for DoD audit oversight.
In a related effort, DCAA has several initiatives to reduce the backlog of incurred cost audits, which must be performed before most contracts can be closed. The goals are to reduce the number of overage government contracts, avoid loss of DoD funds, improve contractor cash flow, and reduce the time required to close government contracts.
During FY 1994, DCAA issued over 68,000 audit reports, examining about $275 billion of federal government contract actions. During this period, DCAA audit recommendations resulted in savings or cost avoidance to the government in excess of $3.9 billion.
Travel Reengineering Initiative
Reform of the temporary duty (TDY) travel system for all DoD organizations is the objective of the DoD Task Force to Reengineer Travel, whose recommendations are now being reviewed. The goal is to design an equitable TDY system that will meet the operational mission requirements of the Department, improve service to the customers of the system, and reduce the overall cost to the government.
The Department's current leadership recognizes that nothing less than fundamental and comprehensive change to DoD financial processes and systems is acceptable. Such change is now well underway with some successes already evident. In other cases, full success must await the consolidation of systems and facilities, the full implementation of better business practices, or the fielding of new hardware and software. However, the delay and expense of these actions are compensated by the reality that their foundation is the most fundamental reform of financial processes and systems since the Department of Defense was established nearly five decades ago.
