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Chapter 13

FINANCIAL MANAGEMENT REFORM

The Department of Defense is continuing the vigorous transformation of its financial management operations, processes, and systems. The goal is to ensure that DoD financial management fulfills the information needs of decision makers, satisfies statutory requirements, eliminates fraud and waste, and provides superior customer service. Actions to advance these goals and a comprehensive new concept for financial operations are summarized in this chapter and in the Department’s Financial Management Improvement Plan, available at http://www.dtic.mil/comptroller.

In its financial management, DoD is transitioning from a time when many DoD component organizations had their own pay and accounting systems, most of which were incompatible with each other. Virtually all DoD component accounting systems were designed to account for how money appropriated by Congress was spent, not to incorporate generally accepted accounting practices prevalent outside government or to provide meaningful management information.

Once fully transformed, the Department’s financial management will rely on a minimum number of modernized finance and accounting systems, adhere to government–wide accounting requirements adopted in the last several years, and reap the benefits of substantial compatibility among its financial and non–financial systems. DoD decision makers will have the fullest availability of data on costs—so that they can allocate resources most wisely. Decision makers also will be able to make the best assessment of how well funds are achieving their intended purposes. Finally, more accurate and timely financial services will be provided at the lowest achievable cost.

CONSOLIDATION OF OPERATIONS AND SYSTEMS

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 improvements. By consolidating over 330 financial management field sites into five DFAS centers and 20 operating locations, the Department has been better able to eliminate redundancy, facilitate standardization, improve and speed up service to customers, and increase productivity. Through consolidation and reform, DFAS has generated savings in operating costs totaling about $1 billion since 1991.

Consolidation of Finance and Accounting Systems

DFAS manages two types of DoD financial management systems—finance and accounting. Finance systems process payments to the Department’s military and civilian personnel, retirees, annuitants, and vendors and contractors. Accounting systems record, accumulate, and report financial activity.

As of October 1999, 98 finance and accounting systems were operating—down from 324 in 1991. Finance systems have been reduced to 15, with a goal of only nine by FY 2003. Accounting systems are down to 83, with a goal of 22 or fewer by FY 2003.

These consolidations achieve genuine benefits. For example, in bringing into a single system all of DoD’s one million civilian payroll accounts, 26 separate systems were eliminated and 348 payroll offices closed. In 1999, a typical civilian payroll technician handled over 2,100 accounts, compared to 380 accounts in 1991.

Expanding Competition to Improve Services and Reduce Cost

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. In 1996, DFAS began selecting certain finance and accounting functions to be considered for competitive sourcing. DFAS has identified over 85 percent of its personnel as available for competition and has committed to study over 6,000 positions during the next five years.

STRENGTHENING INTERNAL CONTROLS

Internal Controls, Information Assurance, and Fraud Detection

To strengthen internal controls and elevate fraud awareness, DFAS is improving its processes by implementing a single standard general ledger; an integrated database for finance and accounting functions; and automated measures for costs, performance, and other outputs. These actions will provide a single, consistent set of policies and procedures for financial transactions, as well as safeguards for the verification and preservation of assets. DFAS and other DoD organizations also continue to implement information assurance programs and fraud detection and protection measures. Efforts include better controls to reduce vulnerability and improved employee fraud awareness training. DFAS recently formed a Fraud and Internal Control Office to help ensure that programs achieve intended results, laws and regulations are obeyed, resources are appropriate for a program’s mission, data is reliable, and fraud and mismanagement are prevented.

Contractor Payments and Audits

To improve its contract payment process, the Department now allows for the submission of vouchers (requests for payment) directly to DFAS by approved contractors. Previously, such vouchers had to be reviewed by the Defense Contract Audit Agency (DCAA) prior to being submitted to DFAS. This reform saves substantial staff and processing time without putting accountability at risk, as DCAA continues to provide oversight through periodic reviews. DCAA is continuing to minimize costs without jeopardizing accountability by reducing its level of audit hours devoted to low risk contractors (i.e., those with good audit histories and no more than $10 million of annual reimbursable contracts). Such contractors are subject to audit only once every three years on a sampling basis. Additionally, to speed up audits and expedite the closeout of contracts, DCAA has begun concurrent auditing for contractors with good internal controls. By auditing transactions soon after they occur rather than after the end of the contractor’s fiscal year, DCAA’s work can be completed sooner, overhead rates settled more quickly, and contracts closed faster.

IMPLEMENTING NEW FEDERAL ACCOUNTING STANDARDS

The Department is taking aggressive action to implement new federal accounting standards. This requires overhauling DoD–wide management information and both a long–term and short–term strategy.

The long–term strategy is, through reengineering or replacement, to ensure that DoD financial systems can implement new federal accounting standards and that they interface with the Department’s other financial systems as well as the non–financial systems that feed data to them. Only 20 percent of the information needed for sound financial management originates in systems under the control of DoD’s financial community. The remainder comes from non–financial feeder systems—most notably from acquisition, logistics, medical, and personnel systems. It is an enormous challenge to upgrade those feeder systems to produce the needed information and to improve their interfaces with DoD financial systems—especially since the primary purpose of those non–financial systems is to support U.S. military forces and people, not to produce financial data.

Short–term, the Department is developing interim methodologies to achieve acceptable results in its major accounts sufficient to support a more favorable opinion on DoD financial statements. For example, the Department has hired respected private accounting firms to assist in the valuation of its property and in the development of new procedures on accountability. The Department also is working with the audit community to develop more detailed policy guidance to assist DoD components in identifying and reporting information needed for better financial statements. Interim actions likewise are being advanced to overcome gaps or problems in current information flows. All these actions are being done in partnership with the Office of Management and Budget, General Accounting Office (GAO), and DoD Inspector General.

ADOPTING BEST BUSINESS PRACTICES

A critical aspect of the Department’s financial management reform is to exploit successful business practices from both the private and government sectors. The goal is to make DoD business practices simpler, more efficient, and less prone to error.

Improving the Exchange of Financial Information

DFAS is promoting the paperless exchange of financial information through a variety of initiatives. Electronic document management (EDM) and World Wide Web applications are enabling on–line, real–time access to documents needed to perform bill paying and accounting operations. Under this process, contracts, government bills of lading, and payment vouchers can be stored in an electronic file and shared among DFAS activities. Another application eliminates the printing of reports by converting them into an electronic format for on–line analysis, reconciliation, and reporting. EDM technology also is being used to enhance the control and management of documents needed for bill paying operations, regardless of the format of the document, as well as to link directly to DoD pay systems, which has reduced the cost of processing garnishment cases.

Electronic funds transfer (EFT) is being used extensively to reduce the cost of disbursements. Over 98 percent of DoD civilian employees and military members paid by the Department have their pay directly deposited into their accounts. The direct deposit participation rate for travel payments now is up to 94 percent. In FY 1999, EFT accounted for about 90 percent ($63 billion) of the total contract dollars disbursed by the Department.

DFAS is using Electronic Data Interchange (EDI) to send remittance information directly to vendors and currently is processing EDI contracts and contract modifications into its finance and accounting systems. DFAS also has implemented a Web–based invoicing system, which provides industry with an economical method to submit electronic invoices.

Through its Joint Electronic Commerce Program Office, the Department has fielded the Web–based Central Contractor Registration (CCR), a single database of basic business information from contractors that want to do business with DoD. CCR provides all DoD procurement and payment offices with a single source of valid and reliable contractor data. The CCR capability also helps DFAS capture required data up front, enabling it to exchange EDI and pay via EFT.

The Department also is implementing the Defense Cash Accountability System (DCAS), through which disbursement voucher data will be collected electronically under one central system and distributed electronically for posting to accounting systems. DCAS will reduce the DoD disbursing cycle from over 90 days to just two days.

Travel Reengineering

The Department continues to reengineer its management of travel by DoD personnel. The goal is a more efficient, customer–oriented travel system that fully supports DoD requirements. Procedures have been simplified and refined as a result of extensive analysis and the conduct of pilots in various operating environments.

New DoD travel policies include expanded use of EFT to process travel settlements and greater use of a government–sponsored, contractor–issued travel card to pay for all official travel expenses.

Digital Signature

To help achieve the goal of paperless contracting, DoD leaders—working with the Departments of Commerce and Energy and GAO—developed a software specification that creates a digital signature that is compliant with federal standards. This initiative is being piloted and eventually will be available to all DoD personnel via a chip–enabled common access card.

Information Infrastructure

The DFAS Corporate Information Infrastructure (DCII) is being implemented to help modernize DFAS finance and accounting systems and to establish the information environment needed to support future DoD financial activities. DCII will support the use of common standard data for the collection, storage, and retrieval of financial information, and simplify and standardize DoD finance and accounting transactions. DCII also will integrate DFAS migratory and legacy systems, as well as feeder systems of DoD components. Included in DCII is an ambitious effort to standardize and share acquisition data. This will greatly improve the interactions between DoD procurement systems and the financial systems that process and account for payments of procurements.

CONCLUSION

The Department’s financial management reforms are continuing to cut costs and improve effectiveness by exploiting the best of private and government practices. Especially productive are the extensive use of consolidation, standardization, simplification, and advanced technology. The Department has achieved substantial progress and is fundamentally transforming DoD financial activities, as well as other functional areas with which those activities must interact.

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