Paying the price

Chronic financial mismanagement throughout the Defense Department-fueled largely by outdated, incompatible information systems-could hit the Pentagon in the pocketbook next year, under a House-passed appropriations provision that would withhold funds from any section that does not comply with certain government-wide accounting requirements.

"This extraordinary measure is required to protect the taxpayer," Democratic Rep. Dennis Kucinich of Ohio told his House colleagues last month.

Offering the provision as an amendment to the Defense appropriations bill, H.R. 5010, Kucinich noted that "no major part of the Pentagon has ever passed the test of an independent audit" since the Chief Financial Officers Act of 1990 first mandated audits by the inspectors general of all federal agencies.

"We have an obligation to the men and women who serve [in the military], to say that the Defense Department has to be accountable," said Kucinich, whose amendment would withhold 1 percent of the budget of any section of the Defense Department that does not score a passing grade on the inspector general's audit.

GAO Findings Spur Amendment's Creation

Kucinich said his amendment, which the House adopted on June 27 by voice vote, was prompted in part by recent General Accounting Office investigation that tracked the path of a single procurement item through "the maze of different accounting, inventory and financial systems at the Department of Defense."

The case study of that item-a lightweight suit designed to protect soldiers from a chemical or biological attack-illustrated the manner in which inefficient, outdated information systems perpetuate costly, ineffective business practices throughout the Defense Department.

"We found that the chem-bio suit inventory process was characterized by stovepiped, non-integrated systems with numerous costly, error-prone manual processes," Gregory Kutz, director of the GAO's financial management assurance team, told the House Government Reform Subcommittee on National Security, Veterans Affairs and International Relations on June 25.

GAO officials said those antiquated processes have made it nearly impossible for the Pentagon to keep track of most of the 1.6 million chem-bio suits it had purchased by the end of fiscal 2001, at a cost of $320 million. "No one can tell you today where the 1.6 million suits are located with any degree of assurance that they would be able to pull them to a single location and redistribute them," John Ryan of the GAO's Office of Special Investigations told the subcommittee.

Kutz said 1.2 million of the suits were deployed to military units stationed all over the world, whose inventory methods range from "automated systems to spreadsheet applications to pen and paper to dry-eraser boards ... to none."

Kutz added that although the Pentagon buys hundreds of thousands of new suits annually-due to high demand among troops-the GAO found that some military units had misidentified large numbers of the protective suits as surplus items. Some of those supposed "surplus" suits-which had cost the Pentagon about $107 a piece-were recently sold in an Internet auction for about $3 each, Kutz said.

After learning of the auction from the GAO, Pentagon officials intervened, prevented the suits from being delivered to the would-be buyers, and referred the incident to a terrorism task force. "Based on the bidding information that we saw and the lack of background information ... we truly believe that these needed to be referred and they needed to be checked out," Ryan told the subcommittee.

The Defense Department also has had problems keeping track of weapons and ammunition, according to David Warren, director of the GAO's defense capabilities and management team.

"It's either record-keeping problems and/or systems that are not talking effectively to one another and not working in an integrated fashion," Warren told the panel, adding that Pentagon officials have identified inventory management as a "high-risk area" since 1990.

Defense To Integrate More Than 1,100 Info Systems

Lawmakers noted that the Pentagon's tangled web of financial and accounting glitches extends far beyond inventory management. "We asked the GAO to examine only one relatively inexpensive item, but the dysfunctional systems governing this item are the same systems governing all of the Pentagon's purchases, budgets and inventories," said Kucinich, who serves as ranking Democrat on the subcommittee.

Defense officials expect to spend between $4 billion and $5 billion over the next five years to modernize and integrate more than 1,100 information systems that feed into the Pentagon's financial and accounting processes.

But that modernization effort will require a department-wide "blueprint," according to Lawrence Lanzillotta, deputy undersecretary of Defense for management reform. "[The Defense Department's] financial management can only be put right by re-engineering our business processes and developing an overarching architecture to provide the information needed to guide and account for management decisions," Lanzillotta told the Government Reform subcommittee on June 4.

Lanzillotta said the Pentagon expects to have such a blueprint by April 2003, and will begin deploying a "department-wide solution" by 2005. But Pentagon officials have estimated that completing that task-and obtaining a clean audit-could take between eight and 10 years.

Some lawmakers have balked at that time frame. "Can anyone fathom a chairman of a commercial enterprise insisting to its shareholders that it needs a decade before its books are auditable?" Kucinich said. "Nobody in the private sector could ever get away with this for too long. Enron proved that."

Lanzillotta said he was "not pleased" with that projected time period, and expressed optimism that the Pentagon could "probably do it faster." But he noted that the Defense Department's "huge and dynamic" financial management problem goes back decades.

"We are not happy that we've found the complexity of the problem that we've found," Lanzillotta said. "We are trying to deal with it in an orderly way. And we have sought input from everybody we could to try to do this."

Private Sector Aids In Reform Efforts

Much of that input is coming from the private sector. IBM recently won the multi-year contract to develop the Pentagon's financial management enterprise architecture, and Lanzillotta said Defense officials are also seeking independent recommendations from industry experts. "Private sector expertise remains key to our reform," Lanzillotta told the subcommittee.

Deputy Inspector General Robert Lieberman told the panel it will take "several years" for those reform efforts to earn the Pentagon a clean audit report. But he said he is "cautiously optimistic" that Defense officials-and lawmakers-are on the right track.

"For the first time in the 12 years since the Chief Financial Officers Act was enacted, I believe the executive and legislative branches are on the same page in terms of what needs to be done to transform [the Defense Department's] financial management," Lieberman said.

Rep. Christopher Shays, R-Conn., who chairs the Government Reform subcommittee, said those Pentagon reforms are crucial to the nation's ability to combat 21st century threats. "The urgency of the war on terrorism demands financial management systems as smart as our weaponry," Shays said. "We cannot afford a margin of error, militarily or fiscally."