INTRODUCTION
In the early 1990s, then-Secretary of Defense Cheney and Deputy Secretary Atwood initiated several important financial management (FM) improvements. Early in his tenure, Secretary Perry directed a review of these initiatives and made major adjustments to increase their likelihood of success. More importantly, DoD leaders also concluded that the Department's financial management deficiencies were more fundamental and entrenched than previously recognized. They therefore undertook a comprehensive diagnosis of FM problems and causes, and launched new policies and far-reaching reforms to set things right. As a result, the Department is now embarked upon the most comprehensive reform of FM systems and practices in its history.
Planned reforms aim to streamline and redesign DoD financial processes and organizations in order to make them optimally effective and to cut costs. Reforms also seek to ensure that the Department's financial management fulfills the needs of its leaders, meets statutory requirements, maximizes efficiency, minimizes fraud, and provides superlative customer service.
PROBLEMS AND CAUSES
Since its formation in 1947, the Department of Defense has had a decentralized mode of operations. Reflecting that reality, the three military departments and the major DoD agencies have, until recent reforms began, always managed their own budget, finance, and accounting systems. They developed their own processes and business practices, geared to their particular mission and with little need to achieve compatibility with other DoD operations. As defense missions became more complicated and DoD organizations were required to interact more with each other, systems incompatibility and lack of standardization took a toll. Rather than redesigning its organization or standardizing its multitude of systems, the Department developed increasingly complex business practices to link its systems.
Illustrative of this situation, it traditionally has taken up to a hundred paper transactions among as many as a dozen DoD organizations to make a progress payment toward the acquisition of a complex weapon system. Moreover, after the payment has been made, the final accounting for that payment typically has required considerable time and effort to complete -- resulting in the accumulation of problem disbursements.
Such complexity left DoD financial systems prone to error or to demands that could not be met with the systems, personnel, or time available. No matter how good the people operating the systems, problems were inevitable. Moreover, there was an inherent inefficiency in having scores of incompatible organizations performing virtually identical functions. For example, there was only one pay schedule for military people and one for DoD civilians, yet DoD maintained dozens of different pay systems.
REFORM INITIATIVES AND PROGRESS TO DATE
Highlighted below are the major Defense initiatives for FM reform:
DFAS and the Consolidation of Financial Management Operations
Since its activation in January 1991, the Defense Finance and Accounting Service (DFAS) has been the Department's pivotal agent for financial management reform and consolidation. Through FY 1995, DFAS achieved budget savings of $314 million.
DoD's FM systems are of two types: (1) finance systems for processing payments to DoD personnel/ organizations and to private contractors; and (2) accounting systems for recording, accumulating, reporting, and analyzing of financial activity -- to include revenues and other receipts. Before DFAS was established, the Department had some 250 of these finance and accounting systems.
Before consolidation began, the Department's many FM systems operated from over 300 field activities or sites. DFAS is now streamlining these down to five DFAS Centers and no more than 21 Operating Locations. As the following two charts illustrate as of October 1995, 110 FM activities had been closed or consolidated. Another 80 are scheduled for FY 1996, and all remaining streamlining will be completed by FY 1999.
This consolidation of operations, along with the consolidation of finance systems detailed on the following page, will eliminate redundancy and unnecessary management layers, facilitate standardization, improve and speed up operations and service to customers, increase work force productivity, facilitate expanded use of innovative technology, and enhance the financial management support of DoD decision makers.
In its financial management reform, the Department is reaching beyond its organizational confines to find the best way of doing business. For example, DFAS has initiated DoD-private sector cost comparisons in the functional areas of logistics and administrative support of its facilities, debt and claims management, and vendor pay in support of the Defense Commissary Agency. The objective is to determine how best to provide the most cost-effective FM services. For some functions, that may mean contracting out to the private sector. For example, in two business areas -- printing/ publications and base support for the Navy -- DoD plans to switch to commercial off-the-shelf accounting systems.
Consolidation of Finance Systems
As reform is carried out, finance and accounting operations must continue to operate. People must be paid and accounts kept current. Because of these and other considerations, the consolidation of financial management systems is being carried out in stages. The first step is to designate certain existing FM systems as migratory systems, into which all existing systems can be consolidated without serious difficulty. In preparing these designated systems for their expanded role, the Department adapts the best features of existing systems, corrects reasonably correctable deficiencies, improves processing and reporting capabilities as much as possible, and seeks cost savings.
The next step is to develop optimum follow-on systems, drawing on lessons from the migratory systems and taking full advantage of the latest technology. The transition to these optimum systems will be at a pace determined by the money and technologies available for such a transition, and other circumstances.
The consolidation of DoD finance systems is well underway, with the implementation of five migratory finance systems proceeding rapidly:
In addition to the above, all contract payments have now been consolidated into one migratory system. Plans are underway for transitioning to a thoroughly revamped new processing system.
Consolidation of Accounting Systems
The Department continues to work hard to eliminate as many as 100 accounting systems. Also as least as important are ongoing improvements to the remaining systems -- to make them more compliant with generally accepted accounting principles and the Chief Financial Officers (CFO) Act. DoD accounting systems also must be capable of providing accurate, timely, and auditable information and support for cost effectiveness.
In the general accounting area, migratory systems have been selected to maintain, without undue disruption, the operations of the three military departments. DoD has already gone from 91 general fund accounting systems in 1991 to 77 in 1995; a further reduction to 53 systems by 1998 is anticipated. These migratory systems are continuously being improved to make them more accurate, timely, and compliant with the CFO Act. DoD is also working to improve greatly the link between accounting systems and the nonfinancial systems that handle logistics, procurement, and contracting. In the functional area of business operations, the Defense Business Operations Fund (DBOF) Corporate Board has approved 18 migratory accounting systems to handle the consolidation of the current 77 systems. These DBOF migratory systems are expected to be operational beginning in February 1998.
Reflecting the complexity of the task, progress on consolidating DoD accounting systems has lagged behind the streamlining of finance systems. For this and other reasons, the Department is exploring more radical alternatives, to include contracting out the accounting function for certain industrial activities.
Reengineering Business Practices
A critical component of DoD's financial management reform is the reengineering of its business practices, i.e., the procedures by which it functions. The goal is to make DoD business practices simpler, more efficient, and less prone to error. Reengineering is being achieved by the revision of existing policies and procedures and the increased standardization, consolidation, and compatibility of existing systems.
In advancing the consolidation of DoD financial operations, DFAS is achieving a significant reengineering of the associated business practices. The organizational structure of DFAS's five centers and 21 Operating Locations is designed to facilitate standardization and streamlining, improve accountability, reduce data incompatibility, and improve customer service. Substantial reengineering also was achieved in the development of the new payroll/payment systems.
Electronic commerce/electronic data interchange (EC/ EDI) technology is a major tool in DoD's reengineering effort to promote the paperless exchange of financial information, thereby saving time and money. DFAS is spearheading the widespread adoption of EC/EDI for DoD financial systems. For example, EDI is currently used to process invoices in the Standard Automated Material Management System. In addition, DoD is implementing EDI for payment notification to vendors and the direct input of data into accounting systems.
During 1995, DFAS reengineered all processes by which the Department garnishes the pay of employees for child support, alimony, commercial debt, and divisions of retired pay. The new processes will be implemented in FY 1996. In October 1995, DFAS completed its consolidation of DoD garnishment operations at its Cleveland Center. In FY 1997 and 1998, DFAS will introduce and integrate EDI, imaging, and artificial intelligence technologies into its reengineered processes. These changes are expected to increase dramatically the efficiency of DoD garnishment operations and reduce their cost significantly.
Travel Reengineering
Another important reengineering effort is simplifying the process for temporary duty (TDY) travel by DoD civilian and military personnel. The goal is to eliminate many of the steps now required to initiate travel, process a voucher, and receive payment. A new paperless system will meet the needs of travelers, support mission requirements, and save as much as $100 million annually. The Department will rely on the private sector for most travel-related services -- except the obligation and approval of funds, final accounting, and random audit.
Features of the reengineered TDY system include:
Standardization of Data
The standardization of financial management data throughout the Department is crucial to reform. It facilitates the consolidation of FM systems, enables the sharing of data and greater compatibility between FM and non-FM systems, and supports the reengineering of business practices. Until recent consolidation efforts began, DoD finance and accounting systems managed 100,000 data elements. Detailed data modeling has indicated that DoD financial operations eventually could be conducted with fewer than 800 carefully designed standard data elements. As of June 1995, the Department has adopted 540 standard FM data elements; additional elements are likely to be added in the future.
Also supporting reform is an ambitious effort to standardize and share acquisition data. This will greatly improve the interactions between DoD procurement systems and the FM systems that process and account for payments for procurement.
To foster standardization beyond just data, the Department is consolidating financial policy and procedures into a single 15-volume DoD Financial Management Regulation. This will replace a myriad of existing regulations and will clarify and expand upon many FM procedures.
Eliminating Problem Disbursements and Other Internal Control Problems
Problem disbursements in DoD financial operations occur when an expenditure has not been reconciled with official accounting records. Such occurrences are the result of a decades-old practice that allowed payments to be made after validation of the receipt of the related goods and services, but before ensuring there was a clear path back to the appropriate accounting entry. This practice is being phased out as quickly as possible, and DoD has been working hard to resolve problem disbursements that have accumulated because of it.
DoD has made substantial progress in reducing three types of problem disbursements:
By June 1993, when it increased efforts to solve this situation, the Department had accumulated a total of $51.1 billion in problem disbursements. By November 1995, the backlog had been reduced to $22.0 billion. These remaining problem disbursements are concentrated in Navy accounts and reflect the greater complexity of supporting deployed naval forces worldwide. The Department expects to hold the line on all problem disbursements for the Army, Air Force, Marine Corps, and defense agencies, and to cut Navy ones in half by January 1997.
While DoD's problem disbursements have been a serious failure needing remedy, there is no basis for concluding that the expenditures involved were wasted. Each expenditure was made only after a Department official confirmed receipt of the subject goods or services and ensured that the payment was made in accordance with a valid contract. That safeguard has been scrupulously followed. The failure was not having these valid and proper disbursements reconciled with accounting records in a timely manner.
To prevent future problem disbursements, the Department is working toward requiring that every disbursement be matched to an obligation before payment is made. In July 1995, DoD began requiring that all payments of $5 million or more be prevalidated before they are made. In October 1995, prevalidation began for payments of $1 million for many of the payment and accounting systems.
Overpayments to DoD contractors constitute another area receiving intense management attention. The chart below shows DoD's dramatic reductions to the scope of the problem. While contractor overpayments must not and will not be tolerated, it is important to put them in proper perspective. DFAS's Columbus Center processes contractor payments totaling $90 billion annually, or about $35 million in disbursements per hour. Of this total, contractor overpayments amount to about 0.3 of 1 percent. In other words, DoD is about 99.7 percent accurate. However, that is not good enough, and the Department is working hard to improve this record.
The Department also has taken bold action to correct and prevent Antideficiency Act violations. During FY 1995, the Department completed over two-thirds of the 94 antideficiency investigations underway at the start of the year. To prevent violations, DoD components have strengthened their internal controls and their training aimed at avoiding and detecting antideficiency problems. DoD also is developing new computer-based training about fiscal law and the prevention of Antideficiency Act violations. Of further assistance are major efforts to ensure DoD compliance with the Federal Managers Financial Integrity Act (FMFIA).
Computer Security and Fraud Detection
In June 1994, the Department established Operation Mongoose to detect fraud and reduce the vulnerability of its computer networks to intrusion. The program is jointly sponsored by the Under Secretary of Defense (Comptroller), DFAS, Defense Manpower Data Center, Assistant Secretary of Defense for Reserve Affairs, and the DoD Inspector General. Data matches from multiple sources are used to identify potentially fraudulent payments to individuals or contractors. Payments can be monitored and validated from the civilian, military, retired and annuitant, vendor, and transportation pay systems. Besides data matches, Operation Mongoose uses face-to-face interviews to verify retiree/ annuitant claims. Past incidences of fraud generally were made possible by deficiencies in DoD FM systems and inadequate internal controls. Therefore, fraud investigations have been used to identify and change practices that permitted the wrongdoing.
While Operation Mongoose is designed to detect potential cases of fraud or abuse in the tens of millions of financial transactions undertaken every year, it also has a more important purpose -- to identify potential weaknesses in the underlying controls to make it much harder for would-be culprits to abuse the system.
Management Incentives
A fundamental aim of DoD reform is to more effectively use financial controls to support desirable management incentives. For example, a key goal of the DBOF initiative has been to guide management decisions toward genuine cost consciousness by prescribing that all relevant data be included in the costs affecting those decisions. To encourage greater cost effectiveness, the Department is devising ways to track budget expenditures relative to their associated outcomes, as required by the Chief Financial Officers Act and the Government Performance and Results Act.
CONCLUSION
Financial management in the Department of Defense is a work in progress. There have been notable successes, but progress is slow in some areas. It is impossible to reverse decades-old problems overnight, and some reforms will require several years of transition, experimentation, reengineering, and modernization.
In moving ahead, DoD financial management reform must accommodate two unavoidable constraints. First, the Department cannot stop its financial operations while it fixes outdated business practices and flawed systems. Every day, the Department must manage payrolls, process payments, and produce financial reports. These daily operating requirements impose a strong practical test on all plans for changing systems and business practices.
A second constraint is that lasting reform demands consensus and collaboration. Few solutions rest exclusively within the jurisdiction of the financial management community. Reform of DoD financial management invariably entails changes in the business practices of other defense organizations and functional groups -- like the acquisition or logistics communities. This demands an unusual degree of consensus building and collaboration, which slows the pace of change. But there are no viable shortcuts. Pressing ahead without consensus and collaboration will not produce lasting reform.
DoD's current leadership is committed to making financial management reform a hallmark of its stewardship. Progress to date has been substantial, and the Department is determined to complete this historically significant challenge.
