Who knows where the money goes?

AA 17 9395 1560 4 1 AV 031 BZ 267 0 068342 2B 000000 01030 MAS 0020 To most people, this mix of 51 letters and numbers is meaningless. Yet in the alternate universe of Defense Department financial management, such coding makes sense. The concoction is an example of DOD's accounting coding used to accumulate appropriation, budget and management information for contract payments.

Such a jumble of letters and numbers, however, also illustrates the department's financial management problems—old, inefficient processes and systems, many of which are based on technology dating back to the 1950s and 1960s, according to auditors.

Use of those systems, some of which predate the Cuban missile crisis, has resulted in DOD's perpetual money management woes—none of the military services or major DOD components have passed the test of an independent financial audit because of pervasive weaknesses in financial management systems, operations and controls, the General Accounting Office reported in May.

And despite years of work attempting to improve its financial processes and systems, the department still lacks clear direction, said Greg Kutz, GAO's director of financial management and assurance. "We don't see success following their current path."

DOD, together with the Agriculture Department and the U.S. Agency for International Development, earned failing grades earlier this year on Rep. Stephen Horn's (R-Calif.) financial management ranking.

Although officials from Agriculture and USAID told congressional overseers that they are making progress fixing their systems, DOD has made only "incremental improvements" in how it manages money, Kutz said, and those improvements are eclipsed by the problems.

The widespread problems affect the rest of government, largely because of the enormity of the military. DOD's financial management problems continue to represent the "single largest obstacle" to getting a clean audit on the federal government's financial records, Kutz said. The Pentagon has earmarked $100 million of the nearly $329 billion it is seeking in its fiscal 2002 budget for financial management to begin the long road to success.

Many Systems, Little Integration

The list of problems is daunting. GAO and the Pentagon's inspector general office have criticized DOD's lack of a financial management system architecture, its parochialism among component organizations and its antiquated technology.

"We have a situation where we have different systems that track money different ways and do not interconnect," said DOD comptroller Dov Zakheim at a June 27 press briefing on the new budget.

Fixing the problems will take big money. Zakheim said the cost of overhauling DOD's financial systems could top $2 billion. The IG's office, however, has estimated the fix-it price to be at least $3.7 billion.

A major dilemma is the number of DOD systems. There are 200 Defense mission-critical financial management systems, said Robert Lieberman, acting DOD inspector general, who oversees financial management issues. The military needs "fewer systems [that are] more integrated and modern," he said.

A prime example of financial mismanagement is the Microsoft Corp. Excel spreadsheets that DOD uses to track its travel budget. "The people who need your [travel] numbers don't have them," and maintaining local travel spreadsheets that don't feed into an enterprise system creates inefficiencies, said Lieberman, whose IG experience spans 20 years.

When small organizations keep their budgetary information separate, "it breeds the attitude: "Who cares if they get the problem fixed?' "

Part of the problem, in Lieberman's mind, is that comptrollers in each military branch have fielded and maintained financial management systems without consulting their organization's chief information officers. "This is the biggest systems development effort in DOD. For a CIO not to be involved would be absurd," he said.

It also has been difficult for DOD to field joint management systems that can help it overcome its finance woes.

Officials at the Defense Finance and Accounting Service, for example, adopted an Army Corps of Engineers- produced system and renamed it the Defense Joint Accounting System. But all the services except the Army opted out of using the system, in part because of high deployment costs.

The Defense Business

Even beyond specific problems, a deep-seated debate exists about the importance of auditable books. John Hamre, the former deputy secretary of Defense in the Clinton administration, said that, ultimately, DOD depends on the public's confidence that it can be responsible with taxpayers' money.

Yet he argued bluntly that DOD does not operate in the business world. Military financial systems are designed to answer two critical questions, he said: Is DOD ready to go to war, and is money spent on the purpose for which it was appropriated by Congress?

The purpose of the Defense Department, after all, is to win a war, Hamre said, and there isn't an organization in the world more prepared to carry out the kinds of operations necessary to defeat an enemy.

"Better accounting records wouldn't make a bit of difference" in DOD's ability to carry out that mission, said Hamre, who is now president and chief executive officer of the Center for Strategic & International Studies, a Washington, D.C., think tank.

Hamre also believes DOD has made great strides over the years by centralizing many accounting functions. "There just needs to be more business process discipline in the system."

There has been an element of "better living through better accounting" in recent years, with auditors pushing for arcane rules to meet accounting standards that do not improve the organization's overall financial mess, said Ken Beeks, vice president of the Business Executives for National Security's Tail-to-Tooth team, a group of business leaders that recommends reforming DOD to improve performance.

The idea is not just to straighten out financial records, Beeks noted. "Understanding the relationship of consumption to costs is critical to successfully managing indirect costs" or overhead, the group said.

In the past, there has been little drive to untangle the web of problems. Paul Brubaker, former Pentagon deputy chief information officer, recalled a meeting with senior officials in the DOD comptroller's office who argued that the existing system had served the department well for 40 years. "Why would you want to change it?" an official asked.

"In fact, it is terrible," Brubaker said of DOD's money management prowess. While top private-sector organizations can close their books in a day, tracking such critical management data remains an elusive task for the Pentagon, even months after the fiscal year ends.

Lieberman said the fiscal 2002 request for $100 million to create a coherent DOD financial management systems design is an indication that the Bush administration means business. "The intentions of the new administration are very encouraging," he said. "Fundamentally, financial management reporting is a systems problem, and they realize that."

There are a few bright spots. DFAS officials have been "in the forefront" of retiring redundant systems by cutting down the number of systems they manage from 324 in the early 1990s to a planned 32 by fiscal 2003, Lieberman said.

Although DFAS was the first military agency to produce an auditable financial statement, it is "not a big deal" because DFAS is relatively small, he said. "With a higher percentage of accountants than anyone else [in DOD], they should have a clean audit statement."