Better oversight of contracts called key to repairing Pentagon ledgers

Improving oversight and administration of defense contracts is the key to victory in Pentagon financial managers' struggle to meet a 2017 deadline for auditable books, a Defense Department deputy inspector general official said Friday.

"From the contract officer level to the contract officer on the ground, the more improvement in regulation and oversight of contracts, the more we will know about how we are spending the taxpayers' money," Daniel Blair, deputy inspector general for auditing at Defense, told lawmakers.

Members of the House Oversight and Government Reform Subcommittee on Government Organization, Efficiency and Financial Management heard testimony from three financial management specialists discussing the 14-year-plus effort to integrate some 2,200 separate Pentagon business systems -- handling $2 billion to $3 billion in transactions daily -- to achieve auditability and to get Defense accounting systems off the Government Accountability Office's high-risk list.

In the military, "we say we saved the world in two or four years, but we can't get our books straight in six years," said Rep. Todd Platts, R-Pa., chairman of the subcommittee. "These are not sexy, glamorous or exciting hearings, but it's important to find out how the American people's money is being handled."

Defense Secretary Leon Panetta on Thursday reiterated his position that book-keeping problems must be solved quickly.

Of the 14 Defense entities that are required to prepare annual financial statements, only two have achieved an unqualified opinion, said Blair, the two being the Military Retirement Fund and the Army Corps of Engineers Civil Works. In the push to meet the 2017 deadline, which involves standing up new systems that cost $9 billion, some milestones have already begun to slip, he said.

Mark Easton, the Pentagon's deputy chief financial officer, said the right resources and leaders are in place, particularly at the local levels, to "ensure a world-class management system." But, he said, "enormous fundamental changes" are still needed.

In information technology, for example, "many of our business IT systems are old, functionally stovepiped, and were originally designed to capture financial transactions to conduct basic budgetary accounting," Easton said. To address these problems, "we are reorienting the DoD around end-to-end business processes that support audit goals, implement enterprise resource planning systems, leverage those investments to the maximum extent practicable, modernize legacy systems when necessary and supported by a business case, and also aggressively sunset legacy systems that are obsolete, redundant, or not aligned with our business objectives."

The enterprise resource planning systems, which are part of a broader two-year-old effort known as the Financial Improvement and Audit Readiness plan, are encouraging, but "weaknesses are pervasive," said Asif Khan, director of financial management and assurance at GAO. "Compliance by 2017 could be in jeopardy if the ERPs don't work," he said, stressing the need for training of employees in technically complex audit practices.

The witnesses agreed on the need to improve data reliability and internal controls to reduce improper payments to contractors, ideally preventing them in advance rather than seeking to recover funds already paid out. "There's a learning process," Blair said.

Easton cited a need to reduce the number of systems that have evolved over the years and increase standardization to create an enterprisewide "holistic framework." He likened the Pentagon's experience to that of Henry Ford, "who at first managed his company all out of his own pocket, but then had to become a multinational corporation."