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Financial Management: DOD Inventory of Financial Management Systems Is Incomplete (Letter Report, 01/31/97, GAO/AIMD-97-29).

Pursuant to a legislative requirement, GAO reviewed the Department of
Defense's (DOD) financial management systems, focusing on the accuracy
and completeness of DOD's inventory of financial management systems.

GAO found that: (1) DOD does not have a comprehensive inventory of the
systems it relies on to record, accumulate, classify, and report
financial information; (2) the number of systems included in DOD's
inventory was limited because the regulations and guidance from the
Defense Finance and Accounting Service (DFAS) did not properly define
financial management systems; (3) Office of Management and Budget
Circular A-127, Joint Financial Management Improvement Program system
requirements, and the recently enacted Federal Financial Management
Improvement Act of 1996 define financial management systems to include
the financial systems and the financial portions of mixed systems
necessary to support financial management; (4) a mixed system is defined
as an information system that supports both financial and nonfinancial
functions of the federal government or its components; (5) DOD considers
mixed systems that are generally not within the Chief Financial Officer
(Comptroller) organization, such as acquisition, logistics, and
personnel systems, to be nonfinancial and, therefore, does not include
them in its inventory; (6) although GAO did not identify all of the
systems that should have been included, several of the excluded systems
account for billions of dollars of assets and clearly meet the required
definition of financial management systems.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-97-29
     TITLE:  Financial Management: DOD Inventory of Financial Management 
             Systems Is Incomplete
      DATE:  01/31/97
   SUBJECT:  Financial management systems
             Equipment inventories
             Management information systems
             Chief financial officers
             Financial statements
             Defense procurement
             Logistics
             Inventory control
             Payroll systems
IDENTIFIER:  OMB 5-Year Financial Management Improvement Plan
             U.S. Government Standard General Ledger
             DFAS Systems Inventory Data Base
             DOD Defense Civilian Personnel Data System
             DOD Civil Engineering Material Acquisition System
             Army Continuing Balance System-Expanded
             Air Force Reliability and Maintainability Information System
             Navy Support Equipment Resources Management Information 
             System
             Army Standard Installation/Division Personnel System
             Army Total Personnel System
             DOD Chief Financial Officer Financial Management 5-Year Plan
             DFAS Chief Financial Officer Financial Management 5-Year 
             Plan
             Joint Financial Management Improvement Program
             
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Cover
================================================================ COVER


Report to the Deputy Secretary of Defense

January 1997

FINANCIAL MANAGEMENT - DOD
INVENTORY OF FINANCIAL MANAGEMENT
SYSTEMS IS INCOMPLETE

GAO/AIMD-97-29

Financial Management Systems Inventory

(918886)


Abbreviations
=============================================================== ABBREV

  DOD - x
  CFO - x
  DFAS - x
  IG - x
  OMB - x
  JFMIP - x
  FMFIA - x
  SID - x
  DISA - x
  DIST - x
  CBSX - x
  REMIS - x
  SERMIS - x
  SIDPERS - x

Letter
=============================================================== LETTER


B-275789

January 31, 1997

The Honorable John P.  White
The Deputy Secretary of Defense

Dear Mr.  White: 

In conjunction with our responsibilities under the Government
Management Reform Act of 1994 to audit the consolidated
governmentwide financial statements, we are reviewing the Department
of Defense's (DOD) financial management systems.  This report
discusses the results of the portion of our initial work that
evaluated the accuracy and completeness of DOD's inventory of
financial management systems.  An accurate inventory is a critical
step in DOD's efforts to develop reliable financial management
systems and resolve its long-standing financial management problems. 
DOD's ability to produce accurate, auditable financial statements and
other reliable management reports as required by the Chief Financial
Officers (CFO) Act of 1990, as expanded by the Government Management
Reform Act of 1994, has been hampered by the lack of integrated
financial systems that link accounting, budgeting, and program
information. 

This report is addressed to you because of your role as the chairman
of DOD's Senior Financial Management Oversight Council,\1 which was
established to ensure the involvement of senior DOD leaders in the
financial reform process.  We believe that the Council could
appropriately address the cross-cutting issues raised in this report. 


--------------------
\1 According to its charter, the Council meets on a regular basis to
address financial management deficiencies, approve plans for
proactive solutions to financial management weaknesses and
deficiencies, assign responsibility for correcting financial
management problems, and monitor progress in reforming DOD's
financial management.  The Council's high-level membership includes
the Secretaries of the military departments, Vice Chairman of the
Joint Chiefs of Staff, Under Secretary of Defense (Acquisition and
Technology), Under Secretary of Defense (Comptroller), Chief
Financial Officer, DOD General Counsel, Assistant Secretary of
Defense (Command, Control, Communications and Intelligence), Director
of the Defense Performance Review, and Under Secretary of Defense for
Policy. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

DOD does not have a comprehensive inventory of the systems it relies
on to record, accumulate, classify, and report financial information. 
The number of systems included in DOD's inventory was limited because
the regulations and guidance from the Defense Finance and Accounting
Service (DFAS) did not properly define financial management systems. 
Office of Management and Budget (OMB) Circular A-127, Joint Financial
Management Improvement Program (JFMIP) system requirements, and the
recently enacted Federal Financial Management Improvement Act of 1996
define financial management systems to include the financial systems
and the financial portions of mixed systems necessary to support
financial management.  A mixed system is defined as an information
system that supports both financial and nonfinancial functions of the
federal government or its components. 

DOD considers mixed systems that are generally not within the CFO
(Comptroller) organization (such as acquisition, logistics, and
personnel systems) to be nonfinancial and therefore does not include
them in its inventory.  Although we did not identify all of the
systems that should have been included, several of the excluded
systems account for billions of dollars of assets and clearly meet
the required definition of financial management systems. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :2

In performing our evaluation of the accuracy and completeness of
DOD's reported inventory of financial management systems, we

  -- reviewed DOD guidance related to classifying its systems as
     financial, mixed financial, and nonfinancial;

  -- determined whether systems categorized as nonfinancial contained
     information needed to produce DOD financial statements and other
     financial reports;

  -- compared DOD's financial management systems inventory to other
     DOD systems inventories to determine whether categories of
     systems not included in financial management systems inventories
     and reports were properly categorized as nonfinancial (however,
     we did not test the accuracy of these inventories);

  -- interviewed appropriate DOD, OMB, and DFAS staff to obtain
     information regarding the categorizing and reporting of
     financial management systems;

  -- reviewed federal financial management system guidance and
     applicable laws, the Joint Financial Management Improvement
     Program's (JFMIP) Framework for Federal Financial Management
     Systems, and OMB Circulars A-123, A-127, and A-130; and

  -- reviewed military service audits to identify systems used to
     prepare financial statements. 

We performed our work from December 1995 to November 1996 in the
Washington, D.C., area in accordance with generally accepted
government auditing standards.  We requested agency comments from the
Secretary of Defense or his designee.  The Deputy Chief Financial
Officer provided us with written comments that are discussed in the
"Agency Comments and Our Evaluation" section of this report and
reprinted in appendix II. 


   REQUIREMENTS FOR IDENTIFYING
   FINANCIAL MANAGEMENT SYSTEMS
------------------------------------------------------------ Letter :3

Legislative and other requirements to which DOD is subject recognize
the significance of developing a complete financial management
systems inventory.  The intent of these requirements, as indicated in
the policy statement found in section 6 of OMB Circular A-127, is to
ensure that financial management systems provide complete, reliable,
and timely information to enable government entities to carry out
their fiduciary responsibilities; deter fraud, waste, and abuse; and
facilitate efficient and effective delivery of programs through
relating financial consequences to program performance.  Further
details on federal financial management systems requirements can be
found in appendix I. 

The Chief Financial Officers (CFO) Act of 1990 gives agency CFOs the
responsibility for developing and maintaining integrated accounting
and financial management systems.  In addition, the act requires that
the agency CFO provide policy guidance and oversight of agency
financial management personnel, activities, and operations, including
the implementation of agency asset management systems such as those
for property and inventory management.  OMB implementing guidance
states that the CFO is to approve the design for information systems
that provide, at least in part, financial and/or program performance
data used in financial statements, solely to ensure that CFO needs
are met. 

In addition, CFOs are required to prepare and annually revise agency
plans to implement OMB's 5-year financial management plan for the
federal government.  Agency 5-year plans are to include information
such as the agency's strategy for developing and integrating agency
accounting, financial information, and other financial management
systems. 

A recent congressional initiative in this area is the Federal
Financial Management Improvement Act of 1996, which provides a
legislative mandate to implement and maintain financial management
systems that substantially comply with federal financial management
systems requirements, applicable federal accounting standards, and
the U.S.  Standard General Ledger.  The legislative history of the
act expressly refers to JFMIP requirements and OMB Circular A-127 as
sources of the financial management systems requirements.  If the
head of an agency determines that the agency's financial management
systems do not comply with the requirements of the act, a remediation
plan must be established that includes resources, remedies, and
intermediate target dates necessary to bring the agency's financial
management systems into substantial compliance. 

The act defines financial management systems to include the financial
systems and the financial portions of mixed systems necessary to
support financial management, including automated and manual
processes, procedures, controls, data, hardware, software, and
support personnel dedicated to the operation and maintenance of
system functions.  A mixed system is defined as an information system
that supports both financial and nonfinancial functions of the
federal government or its components. 

Additional key financial management systems requirements include the
following. 

  -- JFMIP's Framework for Federal Financial Management Systems
     provides a model for the development of an integrated financial
     management system. 

  -- Circular A-127 requires that executive agencies develop and
     maintain an agencywide inventory of financial management systems
     and ensure that appropriate assessments of these systems are
     conducted.  Circular A-127 applies to financial management
     systems, which include financial and mixed systems.  The
     circular also requires that agencies establish and maintain a
     single, integrated financial management system.  According to
     the circular, a single, integrated financial management system
     refers to a unified set of financial systems and the financial
     portions of mixed systems encompassing the software, hardware,
     personnel, processes (manual and automated), procedures,
     controls, and data necessary to carry out financial management
     functions, manage financial operations of the agency, and report
     on the agency's financial status to central agencies, the
     Congress, and the public. 

  -- The Paperwork Reduction Act establishes a broad mandate for
     agencies to perform their information resources management
     activities in an efficient, effective, and economical manner. 
     Consistent with the act, Circular A-130 states that the head of
     each agency shall maintain an inventory of the agency's major
     information systems. 

  -- OMB requires that executive agencies, under section 4 of the
     Federal Managers' Financial Integrity Act (FMFIA), produce an
     annual statement on whether their financial management systems
     conform with governmentwide principles, standards, and
     requirements. 


   DOD'S INVENTORY OF FINANCIAL
   MANAGEMENT SYSTEMS IS NOT
   COMPLETE
------------------------------------------------------------ Letter :4

DFAS maintains a DOD inventory of financial systems in the Systems
Inventory Data Base (SID).  Using SID, DOD reported 249 systems in
its fiscal year 1995 annual financial management systems inventory to
OMB.  However, this does not include many systems that DOD relies on
to produce financial management information and reports.  A complete
inventory is a critical step in DOD's efforts to correct its
long-standing financial systems deficiencies and develop a reliable,
integrated financial management system.  These deficiencies have been
a major factor contributing to DOD's inability to fulfill its
stewardship responsibilities for its resources, including maintaining
control over specific assets, such as shipboard supplies and weapons
systems, and over its expenditures, such as payroll and contract
payments.  In addition, the DOD Inspector General (IG) recently
reported\2 that (1) the overarching deficiency that prevented
auditors from rendering audit opinions on fiscal year 1995 DOD
general fund financial statements was the lack of adequate accounting
systems and (2) disclaimers of opinion can most likely be expected
until the next century. 

The number of reported systems has been limited because both DOD
regulations and DFAS guidance did not properly define financial
management systems, as required.  Although we did not identify all of
the systems that should have been included, several of the excluded
systems account for billions of dollars of DOD assets and are clearly
mixed systems that meet the OMB and JFMIP definition of financial
management systems. 


--------------------
\2 Major Deficiencies Preventing Auditors From Rendering Audit
Opinions on FY 1995 DOD General Fund Financial Statements (Report No. 
97-026, Nov.  19, 1996). 


      DOD DEFINITION EXCLUDES
      MIXED SYSTEMS
---------------------------------------------------------- Letter :4.1

DOD Financial Management Regulation (DOD 7000.14-R, Volume 1) does
not include all mixed systems in its definition of financial
management systems, as required.  Instead, the regulation states that
"feeder systems ...  [that] are the initial record of financial data
for processing by accounting systems" are not within the scope of
financial management systems reporting.  The regulation provides the
following specific examples of feeder systems:  (1) logistics and
inventory systems that provide acquisition cost, location, and
quantity information, (2) personnel systems that provide grade and
entitlements information, and (3) timekeeping systems that provide
attendance and leave information. 

DFAS repeats DOD's limited definition of financial management systems
in its annual guidance to Defense components for conducting financial
management systems reviews.  The feeder systems generally excluded by
DOD are typical of systems used to track financial events and are
specifically mentioned in the JFMIP Framework document as critical to
an integrated financial management system. 

An integrated system under general ledger control is necessary to
provide oversight and control to ensure accurate and complete
accounting for DOD's resources.  To be truly effective, DOD's
integrated financial management system must link program delivery to
the systems that process and track financial events.  This linkage is
crucial to support the information needs of management, central
agencies, and the Congress.  Integrated systems help to provide the
overall discipline needed to ensure the accuracy and completeness of
the information that is used to support DOD's stewardship
responsibilities for the vast resources entrusted to it. 

Audit reports have disclosed numerous problems resulting from the
lack of an integrated financial management system that directly
affect the military services' ability to achieve mission objectives. 
For example, in our review of the Department of the Navy's inventory
management, we reported\3

that Navy's item managers could not keep track of the $5.7 billion in
operating materials and supplies on board ships and at 17
redistribution sites.  The Atlantic and Pacific Fleets and other Navy
components are pursuing separate, nonintegrated systems projects in
an attempt to improve visibility and thus management of their
operating materials and supplies. 

In another example, at the end of fiscal year 1995, DOD reported that
it had inventory valued at almost $70 billion, and we estimate that
about half of the inventory includes items that are not needed to
support DOD war reserves or current operating requirements.  Since
1990, GAO has designated DOD inventory management a high-risk area,
with billions of dollars being wasted on excess supplies.  The lack
of integrated financial management systems and the lack of accurate
reliable data to support the quantity, condition, and value of items
have been major contributing factors to DOD's inability to account
for and control its inventory.\4

In addition, we previously reported\5 that thousands of soldiers on
Army's payroll could not be matched with Army personnel records, and
Army had no assurance that these individuals should have been paid. 
In fact, we found that DFAS paid $6.1 million to 2,279 soldiers who
should not have been paid.  In response to our recommendation that
steps be taken to integrate its payroll and personnel systems, DOD
stated that neither the DOD CFO nor the DFAS Director alone had
sufficient authority to ensure that specific steps were taken toward
the integration or interface of payroll and personnel systems. 

Since financial transactions are initiated in systems such as
acquisition, logistics, and personnel, the DOD Comptroller is a
stakeholder in them and has oversight responsibilities in accordance
with the CFO Act.  Furthermore, these systems are covered under the
newly enacted Federal Financial Management Improvement Act of 1996. 
We believe that the Senior Financial Management Oversight Council
could appropriately address issues dealing with systems that have
multiple stakeholders that cross departmental boundaries. 


--------------------
\3 Navy Financial Management:  Improved Management of Operating
Materials and Supplies Could Yield Significant Savings
(GAO/AIMD-96-94, August 16, 1996). 

\4 Defense Inventory Management (GAO/HR-95-5, February 1995). 

\5 Financial Management:  Defense's Systems for Army Military Payroll
Is Unreliable (GAO/AIMD-93-32, Sept.  30, 1993). 


      KEY SYSTEMS EXCLUDED FROM
      INVENTORY
---------------------------------------------------------- Letter :4.2

We compared DOD's inventory of financial management systems to the
systems inventories contained in the Defense Information Systems
Agency's (DISA) Defense Integration Support Tools (DIST) database.\6
As of April 1996, DIST contained 8,624 information systems which were
segregated by category.  DIST labeled 931\7 of the systems as
financial, 682 more than the 249 systems included in the DOD
inventory.  While DOD officials have indicated that the DIST listing
may be incomplete or systems may be incorrectly identified as
supporting financial management, the large discrepancy indicates that
additional financial management systems likely exist. 

Most acquisition, personnel, property, and time and attendance
systems were not included in the DIST financial systems category. 
For example, the DIST database did not identify as financial systems
the Defense Civilian Personnel Data System, used for civilian
personnel management, or the Civil Engineering Material Acquisition
System, an inventory management system.  These systems were also
excluded from the DOD inventory.  We performed a limited search on
the entire DIST database for the key words acquisition, personnel,
property, and time and attendance and identified 282 systems that
contained one or more of these words in their system name and
therefore appeared to meet the OMB and JFMIP definitions of financial
management systems; however, only 43 of those systems were classified
in the DIST as financial and only 6 were reported in the DOD
financial management systems inventory. 

Several systems that were not included in DOD's inventory provide
critical information for use in formulating the financial statements
of the military services.  These systems clearly meet the OMB and
JFMIP definition for financial management systems.  For example,
DOD's list of 249 financial management systems did not include the
following key systems, which account for billions of dollars of DOD
assets and were identified in recent financial statement audit
reports or other financial reporting. 

  -- Continuing Balance System - Expanded (CBSX).  Army uses CBSX to
     report the year-end value of retail equipment on hand and in
     transit for active Army and Army Reserve activities.  In its
     fiscal year 1995 financial statements, Army reported about $82.6
     billion of equipment on hand and about $500 million of assets in
     transit. 

  -- Reliability and Maintainability Information System (REMIS). 
     REMIS is an Air Force system designed to track inventory,
     status, and utilization of aircraft, as well as compute their
     value.  For fiscal year 1995, Air Force used REMIS to report on
     over 9,450 aircraft and 4,500 guided and ballistic missiles
     valued at $144.6 billion. 

  -- Support Equipment Resources Management Information System
     (SERMIS).  This system is Navy's automated source of information
     on naval aviation support equipment assets currently in use. 
     SERMIS maintains financial and management information on support
     equipment valued at $5.3 billion in fiscal year 1995. 

  -- Standard Installation/Division Personnel System (SIDPERS). 
     SIDPERS is the personnel system operated by Army installation
     and field commanders for active duty personnel.  This system is
     used to report data to the Total Army Personnel Data Base which
     in turn reports five pay events to DFAS for about 493,000
     personnel.  Army plans to fully implement a version of SIDPERS
     within the next 2 years which will interface directly with DFAS
     and account for 88 pay events.  Despite their importance to the
     payroll process, neither SIDPERS nor the Total Army Personnel
     Data Base have been identified as financial management systems. 


--------------------
\6 According to a November 5, 1996, memorandum from the Under
Secretary of Defense (Comptroller) and the Assistant Secretary of
Defense (Command, Control, Communications, and Intelligence), the
DIST is the backbone tool for managing the Department's information
technology investment strategies and for identifying functional
information systems interfaces and data exchange requirements. 

\7 We noted that some of the systems classified as financial appeared
more than once under the financial classification.  A total of 1,081
systems were listed in the financial category.  We eliminated the
apparent duplicates, reducing the number to 931 financial systems. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

A comprehensive inventory of the financial management systems used to
record, accumulate, classify, and report DOD's financial management
information is a critical step if DOD is to (1) effectively manage
its existing systems, (2) prioritize and coordinate efforts to
correct its long-standing financial systems deficiencies, and (3)
develop a reliable, integrated financial management system.  DOD's
severe systems deficiencies have been a major factor contributing to
its inability to meet its stewardship responsibilities for the vast
resources entrusted to it.  Finally, until a complete inventory of
financial management systems is developed, DOD will not be able to
fulfill the requirements of the financial management improvement
initiatives enacted by the Congress. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

As part of DOD's long-term systems improvement strategy, we recommend
that

  -- you direct that the Under Secretary of Defense (Comptroller)
     revise the Department of Defense Financial Management
     Regulation, DOD 7000.14-R, Volume 1, to include all mixed
     systems in its definition of financial management systems;

  -- the Senior Financial Management Oversight Council oversee the
     development of an inventory of all financial management systems,
     using the revised definition; and

  -- systems identified be incorporated in the DOD Chief Financial
     Officer Financial Management 5-Year Plan, DFAS Chief Financial
     Officer Financial Management 5-Year Plan, and FMFIA section 4
     reporting. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

In written comments on a draft of this report, DOD's Deputy Chief
Financial Officer stated that DOD concurred or partially concurred
with all of our recommendations.  In response to our first
recommendation that DOD revise its financial management regulations
to include all mixed systems in its definition of financial
management systems, DOD stated that it will use the definition
provided in OMB Circular A-127 as a base for the revised definition. 
DOD further stated that it will also include other relevant statutory
and regulatory requirements in the revised definition.  We want to
reiterate our position that the OMB requirements be fully
implemented.  Since 1984, OMB's Circular A-127 and all subsequent
guidance have included a definition of financial management systems
that includes personnel, property, procurement, and inventory.  These
are the types of systems that DOD has specifically excluded from its
reporting.  The most recent guidance, issued by OMB in 1993,
classifies these types of systems as mixed systems.  Also, the
recently enacted Federal Financial Management Improvement Act of 1996
uses the same definitions for financial management systems and mixed
systems as OMB Circular A-127.  We provided OMB officials with a copy
of our draft report, and they concurred with the representations of
OMB Circular A-127 requirements included in our report. 

DOD partially concurred with our recommendation that the DOD Senior
Financial Management Oversight Council oversee the development of the
financial management systems inventory.  DOD agreed that oversight
was necessary but stated that the Council was not the appropriate
body.  Rather, DOD indicated that this responsibility will remain
with the Chief Financial Officer and DFAS, with assistance from the
DOD components.  In light of the serious deficiencies in DOD's
financial management, DOD must address its financial management
systems problems immediately.  In our view, timely resolution of this
issue can only be accomplished with the involvement of top-level
management throughout the affected components of DOD, such as those
responsible for logistics, acquisition, and personnel.  We continue
to believe that the Council's oversight, together with participation
of the CFO and DFAS, is necessary to ensure that the inventory is
completed as soon as possible. 

We support DOD's efforts to review the DIST database to determine if
any of the systems should be included.  For this effort to succeed,
DOD must adopt a definition of financial management systems that is
consistent with OMB Circular A-127 and the Federal Financial
Management Improvement Act. 

In response to our recommendation that the financial management
systems identified be incorporated in the DOD Chief Financial Officer
Financial Management 5-Year Plan, DFAS Chief Financial Officer
Financial Management 5-Year Plan, and FMFIA section 4 reporting, DOD
stated that it has and will continue to report on its financial
systems.  However, until DOD changes its definition of financial
management systems in acccordance with OMB guidance and the
provisions of the Federal Financial Management Improvement Act, its
reporting will continue to be incomplete.  DOD needs to identify all
of the systems it relies on to manage its vast resources as a
critical step in its efforts to develop reliable financial management
systems and resolve its long-standing financial management problems. 

Although DOD generally concurred with the report's recommendations,
DOD stated that some of the issues addressed in the report were
significantly inaccurate.  Specifically, DOD took issue with the
report in its treatment of three areas. 

First, DOD asserted that its System Inventory Database provides a
comprehensive inventory of financial management systems.  Our report
recognizes that DOD has an inventory maintained in the Systems
Inventory Database.  However, our report points out that DOD's
inventory is not a comprehensive inventory of all DOD financial
management systems.  The report states that the number of reported
systems has been limited because both DOD regulations and DFAS
guidance did not properly define financial management systems.  Most
personnel, property, procurement, and inventory systems have been
excluded from DOD's reporting.  Our report includes examples of
systems not included in DOD's inventory that account for billions of
dollars of DOD assets.  These systems meet OMB's definition of a
mixed system and must be included in a comprehensive inventory if DOD
is to develop a reliable, integrated financial management system. 

Second, DOD stated that DIST is not a database that is used for
baselining financial systems and that the database does not contain a
process or procedure for classifying or certifying systems as
financial systems.  As stated in the report, although the DIST
listing may be incomplete or systems may be incorrectly identified as
supporting financial management, the large disparity between the
number of systems identified in DIST and SID indicates that
additional financial management systems likely exist. 

Third, DOD stated that it is complying with the provisions of OMB
Circular A-127.  Our report recognizes that DOD has an established
process intended to meet OMB requirements.  However, because DOD has
not adopted the OMB definition for financial management systems, its
inventory and reporting have not been comprehensive. 


---------------------------------------------------------- Letter :7.1

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Armed Services, the House
Committee on National Security, the Senate Committee on Governmental
Affairs, the House Committee on Government Reform and Oversight, and
the Director of the Office of Management and Budget.  We are also
sending copies to the Secretary of Defense and the Under Secretary of
Defense (Comptroller).  Copies will also be made available to others
upon request. 

Please contact me at (202) 512-9095 if you have any questions on this
report.  Major contributors to this report are listed in appendix
III. 

Sincerely yours,

Lisa G.  Jacobson
Director, Defense Financial Audits


FINANCIAL MANAGEMENT SYSTEMS
REQUIREMENTS
=========================================================== Appendix I

The following are the specific requirements for financial management
systems to which DOD, as an executive agency, is subject. 


   CHIEF FINANCIAL OFFICERS ACT
--------------------------------------------------------- Appendix I:1

The CFO Act specifies that the responsibilities of an agency CFO are
to include

  -- developing and maintaining integrated accounting and financial
     management systems;

  -- directing, managing, and providing policy guidance and oversight
     of all agency financial management personnel, activities, and
     operations; and

  -- approving and managing financial management systems design and
     enhancement projects. 

On February 27, 1991, OMB issued guidance (M-91-07) for preparing
organization plans required by the CFO Act.  The guidance details the
authorities, functions, and responsibilities that a CFO is to have to
comply with the act.  Specifically, the guidance states that the
organization plans should provide the CFO with authority

  -- to manage directly and/or monitor, evaluate, and approve the
     design, budget, development, implementation, operation, and
     enhancement of agencywide and agency component accounting,
     financial, and asset management systems;

  -- to clear the design for other information systems that provide,
     at least in part, financial and/or program performance data used
     in financial statements, solely to ensure that CFO needs are
     met;

  -- to ensure that program information systems provide financial and
     programmatic data (including program performance measures) on a
     reliable, consistent, and timely basis to agency financial
     management systems; and

  -- to evaluate, where appropriate, the installation and operation
     of such systems. 

In addition, the CFO Act requires OMB to prepare annually and submit
to the Congress a governmentwide 5-year financial management plan
that describes planned OMB and agency activities for the next 5
fiscal years to improve the financial management of the federal
government.  Further, the act requires agency CFOs to prepare and
annually revise agency plans to implement OMB's 5-year plan.  Each
5-year plan is to include information such as the following: 

  -- a description of the existing financial management structure and
     any changes needed to establish an integrated financial
     management system;

  -- a strategy for developing and integrating individual agency
     accounting, financial information, and other financial
     management systems; and

  -- proposals to eliminate duplicate and other unnecessary systems
     and projects to bring existing systems into compliance with
     applicable standards and requirements. 


   OMB REQUIREMENTS
--------------------------------------------------------- Appendix I:2

DOD is subject to section 4 of FMFIA; OMB requires executive agencies
under section 4 to produce an annual statement on whether its
financial management systems conform with governmentwide principles,
standards, and requirements.  Governmentwide systems requirements,
developed by OMB in consultation with the Comptroller General, are
presented in section 7 of OMB Circular A-127, "Financial Management
Systems Requirements."

Circular A-127 requires that executive agencies, including DOD,
develop and maintain an agencywide inventory of financial management
systems and ensure that appropriate assessments are conducted of
these systems.  In addition, DOD must consider the results of its
FMFIA reviews when it develops its financial management systems
plans. 

Requirements for reporting the results of FMFIA section 4 systems
assessments are found in OMB Circular A-123, "Management
Accountability and Control." Executive agencies, including DOD, must
produce an annual statement on whether the agency's financial
management systems conform with governmentwide requirements found in
Circular A-127.  If the agency does not conform with these
requirements, the statement must discuss the agency's plans for
bringing its systems into compliance.  If the agency head judges any
financial management systems weakness to be material, the issue must
be included in the annual FMFIA report.  The FMFIA report is to be
transmitted to the President, the President of the Senate, the
Speaker of the House of Representatives, the Director of OMB, and key
congressional committees and subcommittees. 

Circular A-127 applies to financial management systems, which include
financial and mixed systems.  In determining which systems are
subject to these requirements, the Circular categorizes and defines
information systems in the following manner. 

  -- A financial system (1) collects, processes, maintains,
     transmits, and reports data about financial events, (2) supports
     financial planning or budgeting activities, (3) accumulates and
     reports cost information, or (4) supports the preparation of
     financial statements. 

  -- A mixed system supports both financial and nonfinancial
     functions. 

  -- A nonfinancial system supports nonfinancial functions and any
     financial data included in the system are insignificant to
     agency financial management and/or not required for the
     preparation of financial statements. 

Circular A-127 also requires that DOD establish and maintain a
single, integrated financial management system.  According to the
Circular, a single, integrated financial management system refers to
a unified set of financial systems and the financial portions of
mixed systems encompassing the software, hardware, personnel,
processes (manual and automated), procedures, controls, and data
necessary to carry out financial management functions, manage
financial operations of the agency, and report on the agency's
financial status to central agencies, the Congress, and the public. 
Unified means that the systems are planned for and managed together,
operated in an integrated fashion, and linked together electronically
to provide the agencywide financial system support necessary to carry
out the agency's mission and support the agency's financial
management needs. 

In addition, Circular A-130 provides governmentwide information
resources management policies as required by the Paperwork Reduction
Act of 1980, as amended.  The Paperwork Reduction Act establishes a
broad mandate for agencies to perform their information resources
management activities in an efficient, effective, and economical
manner.  Consistent with the act, Circular A-130 states that the head
of each agency shall maintain an inventory of the agency's major
information systems. 


   CLINGER-COHEN ACT
--------------------------------------------------------- Appendix I:3

Developing and maintaining a complete inventory of DOD's information
resources is essential to implementing a strategic information
resources management process, as required by the Paperwork Reduction
Act and the recently enacted Clinger-Cohen Act of 1996.  The
Clinger-Cohen Act calls for agency heads, under the supervision of
OMB's Director, to design and implement a process for maximizing the
value and assessing and managing the risks of their information
technology acquisitions, including establishing minimum criteria on
whether to undertake an investment in information systems.  This
process is to be integrated with the processes for making budget,
financial, and program management decisions with the agency.  In
addition, the act states that the head of each executive agency, in
consultation with the Chief Information Officer and the Chief
Financial Officer, is responsible for establishing policies and
procedures that ensure that the accounting, financial, and asset
management systems and other information systems of the agency are
designed, developed, maintained, and used effectively to provide
financial or program performance data for financial statements. 


   JFMIP'S MODEL FOR INTEGRATED
   FINANCIAL MANAGEMENT SYSTEMS
--------------------------------------------------------- Appendix I:4

JFMIP's Framework for Federal Financial Management Systems provides a
model for the development of an integrated financial management
system.  This document points out the importance of financial
management systems in the overall effort to improve government. 

     "These systems should not only support the basic accounting
     functions for accurately recording and reporting financial
     transactions but must also be the vehicle for integrated budget,
     financial, and performance information that managers use to make
     decisions on their programs....Without meaningful financial
     information and supporting systems, neither the President, the
     Congress, nor the program managers can effectively carry out
     their stewardship responsibilities."

According to the Framework, an integrated system includes, among
others, the following financial management system types: 

  -- a core financial system that supports general ledger management,
     funds management, payment management, receipt management, and
     cost management;

  -- a personnel/payroll system;

  -- an inventory system;

  -- a property management system;

  -- an acquisition system;

  -- a budget formulation system; and

  -- a managerial cost accounting system. 

To function as a single, integrated system, the types of systems
listed above must have these physical characteristics:  common data
elements, common transaction processing, consistent internal
controls, and efficient transaction entry. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the Department of Defense's
letter dated January 24, 1997. 

1.  See the "Agency Comments and Our Evaluation" section of this
report. 

2.  In a follow-up discussion on DOD's statement that the additional
682 DIST systems have failed to satisfactorily complete the required
process and qualify as legitimate financial management systems, DOD
officials stated that these systems have not yet undergone the
required process.  As stated in DOD's response to our second
recommendation, DOD plans to review the DIST database to determine if
any of these systems should be included in its SID. 

3.  In a January 10, 1997, discussion on a draft of this report, DOD
officials stated that the Department defines a mixed system as an
integrated system that performs both financial and program functions. 
For example, they told us that the Marine Corps Total Force System
meets DOD's definition because it is an integrated payroll and
personnel system that shares the same database for both functions. 
In our discussions, DOD officials indicated that a personnel system
that provided data to a separate payroll system with which it was not
physically integrated would not meet its definition of a mixed system
and therefore would be excluded from its inventory of financial
management systems.  However, neither Circular A-127 nor the Federal
Financial Management Reform Act uses integration as a criterion in
its definition of financial management systems. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Molly Boyle, Assistant Director
Janett Smith, Assistant Director
James Ariail, Senior Auditor
Francine DelVecchio, Communications Analyst

LOS ANGELES REGIONAL OFFICE

Barbara House, Senior Evaluator

CHICAGO REGIONAL OFFICE

Lynn Filla Clark, Senior Evaluator
Neal Gottlieb, Senior Evaluator
Stewart Seman, Senior Evaluator
Lenny Moore, Evaluator

*** End of document. ***





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