During the last four years, improvement of the Department’s financial management has been a top priority. DoD leaders have undertaken the most comprehensive reform of financial management systems and practices in DoD history. Progress has been substantial, but more work still lies ahead.

The Department’s financial management 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 DoD financial management fulfills the needs of its leaders, satisfies statutory requirements, minimizes the potential for fraud, and provides superior customer service.

Since its formation in 1947, DoD has had a decentralized mode of operation. A benefit of that has been high effectiveness and initiative within the military departments and the other organizational components of the Department. Until recent reforms, however, a drawback has been that these DoD components managed their own budget, finance, and accounting systems. As a result, they developed their own processes and business practices, geared to their specific mission without the requirement for compatibility with other DoD operations. But as defense missions became more complex and DoD organizations were required to interact more frequently, system 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.

Such complexity left the DoD’s financial systems prone to error or to demands that could not be met with the systems, personnel, or time available. Moreover, there was an inherent inefficiency in having scores of incompatible organizations performing virtually identical functions on dozens of different financial systems. This chapter highlights reforms to solve these and other DoD financial management problems.

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. DFAS now processes a monthly average of nearly 9 million payments to DoD personnel; 2 million commercial invoices; 675,000 travel vouchers/settlements; 550,000 savings bond issuances; and 340,000 transportation bills of lading, with total monthly disbursements averaging $22.2 billion. Through consolidation and process improvements, DFAS has generated savings in operating costs totaling nearly $1 billion through the end of FY 1997.

Before consolidation began in FY 1994, the Department’s financial management operations were conducted at over 330 field installations or sites. By moving to five DFAS Centers and no more than 21 operating locations, the Department has been able to eliminate redundancy and unnecessary management layers, facilitate standardization, improve and speed up operations and service to customers, increase productivity, and enhance financial management support to DoD decision makers. The Defense Reform Initiative calls for DFAS to make further consolidations.

DoD financial managers are participating in the Administration’s effort to use competition within the government and with the private sector to improve support services and save money. For example, during FY 1996 the Department consolidated debt and claims management activities into one location, saving $8.5 million annually. A facilities, logistics, and administration study, completed in May 1997, will save $4 million annually. Another A-76 study (on Defense Commissary Vendor Payments) was completed in October 1997, with the government’s Most Efficient Organization (MEO) being selected over the private sector vendor. The MEO will be implemented by March 1998, with projected savings expected to exceed $10.1 million annually.

The Department has active A-76 competition studies in the areas of commissary accounting, DoD transportation accounting, and DoD depot maintenance accounting. Additionally, the Defense Reform Initiative directed DFAS to initiate A-76 studies in the areas of civilian pay and military retiree and annuitant pay.

There are two types of DoD financial management systems—Finance and Accounting. Finance systems process payments to DoD personnel, retirees, annuitants, and private contractors. Accounting systems record, accumulate, report, and analyze financial activity. The Department has 156 finance and accounting systems, down from 324 in 1991 when DFAS was established.

The number of DoD finance systems has been reduced from 127 in 1991 to 34, with a resulting annual savings of $77 million. The long-term goal is to cut the number of DoD finance systems to nine.

The consolidations of finance systems has been completed for retiree and annuitant payments and debt management. The Department’s ongoing consolidation of other finance systems includes:

The Department has reduced the number of accounting systems from 197 in FY 1991 to 122 in FY 1997. Simultaneously, DoD has been improving the remaining systems to make them compliant with generally accepted accounting principles and capable of producing auditable information as required by the Chief Financial Officer’s Act of 1990, as amended. By FY 2003, DoD will reduce the number of accounting systems to no more than 23.

A so-called problem disbursement occurs when an expenditure has not been reconciled with official accounting records. DoD problem disbursements have been reduced from $34.3 billion to $9.2 billion in less than four years.

Although DoD’s problem disbursements have been a serious issue, there is no basis for concluding that the expenditures involved were improper. 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 notwithstanding, DoD has an extensive Business Process Reengineering effort under way to improve its disbursement process.

Prevalidation, the procedure of matching a disbursement to an obligation before (rather than after) a payment is made, has helped to reduce problem disbursements. Thresholds for applying prevalidation have been established at each DFAS center. To eliminate problem disbursements, the DoD plan is to:

Contract overpayments are never acceptable, but they occasionally occur. In FY 1993, overpayments on major weapons systems contracts were $592 million; by FY 1997, they had been reduced to $113 million. Recovered funds from overpayments are the result of both solicited and unsolicited actions. Solicited actions are the result of audits and unsolicited are outright returns of funds by contractors. This reflects an accuracy rate of 99.8 percent.

For the past 30 years, vouchers for goods and services purchased on government contracts had to be submitted to government contracting officers or the Defense Contract Audit Agency (DCAA) for approval before being sent to a government payment office. This process substantially delayed payments and required extensive effort by DCAA, government contracting officers, and contractors themselves. DCAA now allows direct submission of vouchers to DFAS by qualifying contractors. DCAA continues to provide oversight by periodic review of contractors and by examining a sampling of paid vouchers. This reform will save substantial auditor time, without putting accountability at risk. It also facilitates the transmission of contractor voucher payments using Electronic Data Interchange, another source of savings and efficiency.

In June 1994, the Department established Operation Mongoose to detect fraud and reduce the vulnerability of DFAS’s computer networks to intrusion. In FY 1997, Operation Mongoose identified over $2.1 million in suspected fraud and overpayments.

The Department is continuing to standardize, improve, and simplify its financial management regulations and procedures. DoD financial management policy and procedures have been consolidated into a 15 volume DoD Financial Management Regulation (DoDFMR), which is expected to replace thousands of pages of separate DoD component regulations. Because the 15 volumes of the DoDFMR have been posted to a DoD web site, routine large-scale printings and distributions of the volumes have been terminated. The DoDFMR is now available only through the Internet or by the purchase of a CD-ROM or paper copy.

The Department is putting into place a financial management systems architecture that is capable of producing auditable financial statements. Additionally, DoD is upgrading the accuracy and timeliness of accounting data and integrating nonfinancial areas that affect financial and accounting data.

The Department is taking aggressive action to improve how it accounts for inventory, in accordance with the Office of Management and Budget Statement of Federal Financial Accounting Standard (SFFAS) Number 3. Conversion of inventories from DoD’s standard (selling) price to the SFFAS requirement of latest acquisition cost, or historical cost, is currently being accomplished. Enhancing inventory management systems to capture proper accounting information will provide for automated inventory valuation, reliable costing of goods sold, and other elements that enable accurate assessment of net operating results.

DoD’s accounting systems were not designed to account for and report on the Department’s real and personal property. Instead, financial information for these assets are obtained from various property data systems, which for the most part are not integrated with the accounting systems. To fix this, the Department is deploying a DoD-wide integrated property accounting system. This system will provide for financial control over real and personal property, replace over 150 separate property systems in DoD organizations, and provide necessary data to the accounting systems.

A critical aspect of the Department’s financial management reform is to adapt and adopt successful business practices from the private and government sectors. The goal is to make DoD business practices simpler, more efficient, and less prone to error. This is being achieved by the revision of existing policies and procedures and the increased standardization, consolidation, capabilities, and compatibility of existing systems.

DFAS is promoting the paperless exchange of financial information through:

Audit working papers are key components of audits performed by DCAA. They document DCAA’s audit work and are sometimes shared with the customer as backups for audit reports. DCAA recently implemented an automated working paper process to make its audit services better, faster, and cheaper. DCAA acknowledges the audit request, performs the audit, and issues the audit report to the customer electronically. In addition, automating the process improves DCAA’s internal communications for supervisory review and report issuance.

As a result of this reform, DCAA can serve customers and obtain feedback on their services faster, helping to reduce the cycle time for negotiations. DCAA’s new working paper process also supports DoD’s efforts to improve the procurement process and will help achieve DoD’s overall goal to become paperless by 2000.

DFAS is continuing the reengineering of the processes by which the Department garnishes the pay of its civilian and military personnel for child support, alimony, commercial debt, and divisions of retired pay. DoD garnishment operations have been consolidated at DFAS Cleveland, which processes about 12,000 garnishment orders per month. Initial reengineering efforts have reduced staffing requirements significantly and are estimated to save $19 million over a five-year period. Over the next year, DFAS plans to implement major improvements—most notably to integrate EDI and imaging technology, and an integrated garnishment system that will provide an electronic interface with the DFAS pay systems. The first interface with the Defense Civilian Pay System was successfully implemented in August 1997. The remaining interfaces are scheduled to be completed by December 1999.

Since starting in 1989, the Department’s participation in the government-wide purchase authorization card program has grown to include over 107,000 cardholders with purchases totaling $2.2 billion for FY 1997. DoD’s goal is that by FY 2000 the purchase card will be used for 90 percent of its micropurchases. Expanded use of the government-wide purchase card—together with other of the defense reform initiatives—will allow retail-level inventories to be reduced from $14 billion in FY 1996 to $10 billion in FY 2001.

The purchase card streamlines purchase approvals, reduces purchasing and accounting documentation, cuts costs, and speeds up vendor payments. It enables the Department to use bulk commitments and obligations in accounting for purchases, summary accounting for groups of purchases instead of detailed lines of accounting for each transaction, and an accelerated payment and invoice reconciliation process with the purchase card issuer.

DFAS processes about 10 million commercial invoices per year, over three-quarters of which are below the $2,500 (micropurchases) threshold for the purchase card. Numerous initiatives are now being pursued to get more of these made with the purchase card. Using an accelerated invoice payment and reconciliation process will enable DFAS to make faster payments, virtually eliminating interest payments. Using summary accounting for groups of purchases will reduce the costs, time, and size of the work force needed to process invoices. The recipient of the benefits of these initiatives is the customer, who will receive procurement efficiencies and lower processing rates for services performed by DFAS.

The Department continues to implement its simplification of the temporary duty travel process for all DoD personnel. Prior to this effort, regulations caused overhead costs to reach as high as 30 percent, compared to a private sector average of 5-10 percent. DoD changed counterproductive practices and designed a seamless, paperless, less costly travel system that supports DoD requirements and provides excellent customer service. The Department also supported passage of the Travel Reform and Savings Act to remove statutory barriers to better business practices. In September 1997, the Vice President’s National Performance Review presented DoD’s reform team with the Hammer Award in recognition of its efforts to streamline government processes.

New DoD travel policies include:

Before fully deploying its new Defense Travel System (DTS), the Department pilot tested these revised policies at 27 sites, representing each of the Services and several defense agencies. Results from the test show a 48 percent reduction in process steps, 56 percent reduction in process cost, 48 percent reduction in payment cycle time, and improvement in customer satisfaction of both travelers and their authorizing officials of close to 100 percent on many indicators.

To achieve the goal of a paperless process, DoD leaders worked with the Departments of Commerce and Energy and the General Accounting Office to develop a software specification that creates a digital signature that is compliant with federal standards. The software specification enables the Department to move to paperless processes. Users will be allowed to sign documents electronically. This process will be tested in the DTS and eventually exported to other functional areas.

In addition to consolidating finance and accounting systems, DoD is establishing the DFAS Corporate Information Infrastructure to support:

Also supporting reform is an ambitious effort to standardize and share acquisition data. This effort will greatly improve the interactions between DoD procurement systems and the financial systems that process and account for payments of procurements.

The Department’s financial management reforms in recent years have been successful and have laid a foundation for even greater improvement. Still ahead are several more years of transition, experimentation, reengineering, and modernization.