[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]





  THE DEFENSE DEPARTMENT'S ILLEGAL MANIPULATION OF APPROPRIATED FUNDS

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
                        FINANCIAL MANAGEMENT AND
                      INTERGOVERNMENTAL RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 26, 2001

                               __________

                           Serial No. 107-60

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform


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                            WASHINGTON : 2002
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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
DOUG OSE, California                 JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky                  JIM TURNER, Texas
JO ANN DAVIS, Virginia               THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania    JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida                 WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              ------ ------
C.L. ``BUTCH'' OTTER, Idaho                      ------
EDWARD L. SCHROCK, Virginia          BERNARD SANDERS, Vermont 
JOHN J. DUNCAN, Tennessee                (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

    Subcommittee on Government Efficiency, Financial Management and 
                      Intergovernmental Relations

                   STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky                  JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida                  MAJOR R. OWENS, New York
DOUG OSE, California                 PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida              CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
   Bonnie Heald, Director of Communications/Professional Staff Member
                         Scott R. Fagan, Clerk
                     Michell Ash, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 26, 2001....................................     1
Statement of:
    Steinhoff, Jeffrey C., Managing Director, Financial 
      Management and Assurance, U.S. General Accounting Office; 
      Thomas R. Bloom, Director, Defense Finance and Accounting 
      Service, Department of Defense; Jo Ann Boutelle, Director 
      of Commercial Pay Services, Defense Finance and Accounting 
      Service, Department of Defense, Columbus, OH; Tina W. 
      Jonas, Deputy Under Secretary of Defense for Financial 
      Matters, Department of Defense; and Major General Everett 
      G. Odgers, Comptroller, Headquarters Air Force Materiel 
      Command, Wright Patterson Air Force Base, Ohio.............    11
Letters, statements, etc., submitted for the record by:
    Bloom, Thomas R., Director, Defense Finance and Accounting 
      Service, Department of Defense, prepared statement of......    25
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Jonas, Tina W., Deputy Under Secretary of Defense for 
      Financial Matters, Department of Defense, prepared 
      statement of...............................................    31
    Schakowsky, Hon. Janice D., a Representative in Congress from 
      the State of Illinois, prepared statement of...............     9
    Steinhoff, Jeffrey C., Managing Director, Financial 
      Management and Assurance, U.S. General Accounting Office, 
      prepared statement of......................................    15

 
  THE DEFENSE DEPARTMENT'S ILLEGAL MANIPULATION OF APPROPRIATED FUNDS

                              ----------                              


                        THURSDAY, JULY 26, 2001

                  House of Representatives,
  Subcommittee on Government Efficiency, Financial 
        Management and Intergovernmental Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Schakowsky, and Owens.
    Staff present: J. Russell George, staff director and chief 
counsel; Bonnie Heald, director of communications; Henry Wray, 
senior counsel; Scott Fagan, assistant to the subcommittee; 
Chris Barkley, staff assistant; Davidson Hulfish, Samantha 
Archey, Fred Ephraim, Fariha Khaliq, and Christopher Armato; 
interns; Michelle Ash, minority counsel; and Jean Gosa, 
minority assistant clerk.
    Mr. Horn. The Subcommittee on Government Efficiency, 
Financial Management and Intergovernmental Relations will come 
to order.
    Congress spends enormous time and effort each year enacting 
appropriations. However, we spend too little time looking at 
what actually happens to those appropriations once they are 
implemented. Too often we just assume that congressional intent 
is carried out. Today's hearing will show that this is not 
always true.
    We will examine and receive today a report from the General 
Accounting Office, and the General Accounting Office, as we all 
know, is headed by a very able Comptroller General, and when we 
refer to the report, it will be GAO, not always General 
Accounting Office. This report is on how the Department of 
Defense manipulates the balances of appropriations years after 
the accounts have been closed in order to free up money beyond 
the limits that Congress has imposed.
    Although this deals with an arcane subject, the GAO report 
provides dramatic proof that the mischief can often be found in 
the details. GAO auditors found that, in 1 year alone, the 
Defense Department came up with $615 million in potential extra 
funding through what the General Accounting Office terms 
``illegal or otherwise improper'' adjustments to old 
appropriations balances. If these findings represent a typical 
year, the Department of Defense may have used those bogus 
``adjustments'' to conjure up billions of dollars in back-door 
spending.
    This is not a new issue. Long ago, Congress suspected that 
the Department of Defense was abusing old appropriations. 
Indeed, legislation initiated by the Committee on Government 
Reform's predecessor, the Committee on Government Operations, 
was enacted in 1990 to stop abuses. However, as this report 
clearly demonstrates, the Department of Defense has failed to 
comply with the law, and the Department's manipulation of old 
appropriations balances has continued largely unabated.
    Today's hearing will examine three issues: First, how did 
these abuses happen? General Accounting Office auditors found 
improprieties that involved flagrant violations of basic legal 
requirements and financial management practices that ignore 
principles taught in Accounting 101. To cite just one example, 
the Department of Defense shifted $38 million in payment 
charges to appropriations that had not even been enacted into 
law at the time the payments were made. We have invited the key 
managers who were involved in these transactions to testify 
today. We intend to get to the bottom of this one way or the 
other.
    Second, we want to know why these abuses persist. The 
General Accounting Office report shows that the Department of 
Defense uses ridiculously complex accounting codes that serve 
no apparent purpose and invite data entry errors. For example, 
the Department requires separate payment codes for bubble gum, 
Tootsie Rolls, and balloons that were purchased for a child 
care center party.
    In a 1997 report, the General Accounting Office stated that 
it was ``imperative'' to fix the Defense Department's ``complex 
and convoluted [contract payment] process.'' The new GAO report 
states that these problems, ``for the most part, still exist 
today.'' In fact, the Department of Defense uses systems, 
policies, and practices that virtually have built-in features 
that cause violations of the law. The Department of Defense has 
known about some of these defects in the systems over the 
years, and no one has really done very much to correct them. 
These abuses have to end.
    Finally, we want to examine how these abuses can be stopped 
once and for all. You have got a new administration. You can 
start from ground zero and move through all of these systems. 
The GAO offers some good recommendations, but its past reports 
have fallen on deaf ears. There are encouraging signs that the 
new administration is intent on resolving the Department of 
Defense's daunting financial management problems, and it needs 
to follow through on those with concrete actions.
    In closing, I want to acknowledge that this GAO report is 
the result of a joint request of this subcommittee and the 
House Budget Committee, chaired by a very able person, 
Representative Jim Nussle of the Budget Committee, who couldn't 
be with us today. However, he has submitted a written statement 
that, without objection, will be in the hearing at this point 
in the record.
    [The prepared statement of Hon. Stephen Horn follows:]

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    Mr. Horn. I welcome our witnesses today and look forward to 
your testimony. I now yield for an opening statement to the 
ranking member, Ms. Schakowsky, the gentlewoman from Illinois.
    Ms. Schakowsky. Mr. Chairman, I thank you for holding this 
hearing. However, I must say that I am disappointed that we 
have to meet once again to review why the Department of Defense 
cannot get its financial house in order.
    At our hearing on the consolidated financial statement on 
March 30th of this year, we learned that most agencies received 
``clean'' or ``qualified'' audit opinions, while DOD received a 
disclaimer. DOD's books were so fraught with error that an 
audit could not even be accomplished. Then at our financial 
management oversight hearing on May 8, 2001, we heard that DOD 
was the biggest culprit of financial mismanagement. Today we 
find that DOD is violating the law. This is not to mention the 
two hearings in March 2001 of the Subcommittee on National 
Security, Veterans Affairs, and International Relations, on 
which I serve, on ``Vulnerabilities to Waste, Fraud and 
Abuse,'' which found that DOD was the most vulnerable of the 
Federal agencies. Or the hearings held by you, Mr. Chairman, 
and your Democratic predecessors for well over a decade 
chronicling the serious financial mismanagement at DOD.
    Today we will hear from the General Accounting Office that 
DOD is illegally or improperly using its closed appropriations 
accounts. Specifically concerned with DOD abuse, Congress 
passed a law, as the chairman mentioned, in 1990 that states 
that appropriations accounts close 5 years after the last year 
in which the money was available for obligation. Yet, DOD seems 
to have ignored this law and has continued to use these closed 
accounts.
    Let me just mention one such illegal use. In 1999, DOD 
adjusted a 1992 account for $79 million. Unfortunately, that 
1992 account closed in 1998 and never should have been touched. 
The law states that if DOD needed to make a payment on the 1992 
account, it should have spent 1999 dollars, not 1992 dollars 
that were no longer available.
    This blatant abuse of appropriations accounts is just one 
more example of DOD's longstanding financial management 
problem. Until DOD establishes the necessary systems, 
procedures, policies, and controls, and takes necessary 
managerial actions, we will continue to hear about such 
missteps.
    I don't know what it is going to take to give top-level DOD 
personnel a wakeup call. GAO has explained that DOD's prospects 
for the future do not look favorable. In GAO's High-Risk Series 
Update, they state:
    ``After having performed hundreds of reviews of major 
weapons systems over the last 20 years, we have seen many of 
the same problems recur--cost increase, schedule delays, and 
performance shortfalls. These problems have proven resistant to 
reform in part because underlying incentives have not 
changed.''
    Mr. Chairman, because of its sheer size and the magnitude 
of money involved, one would think that DOD would have the most 
updated systems and controls in place, and yet, it has the 
worst. I can only hope that DOD will not have to stand before 
this committee a fourth time this year because of financial 
mismanagement. I further hope that all Members of the House 
will join me in opposing the Department of Defense's budget. 
Until DOD gets its financial house in order, it should not be 
rewarded with an increase. Thank you.
    [The prepared statement of Hon. Janice D. Schakowsky 
follows:]

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    Mr. Horn. I thank you, and we will now move to the 
witnesses. I want to let you know a little bit of how this 
subcommittee works. One is, it is an investigating 
subcommittee. We will ask you to approve and affirm the oath 
for not only the ones at the table, but the assistants behind 
the ones at that table. The clerk will take down who are the 
assistants behind, so we don't have to go give the oath to 
somebody whispering in your ear, and we will just do it once.
    When your name is called, the statement, the written 
statement, automatically goes into the record. Don't worry 
about it; it just goes in, and what we would like you to do is 
give us a summary of that statement. The staff and some of us 
have read through all that, and we would like to get sort of 
the essence of these problems and then we would like to have a 
dialog of the members on both sides of the aisle to see if we 
can get to solving some of these problems with you.
    [Witnesses sworn.]
    Mr. Horn. We have 1, 11 sworn in.
    We will start with our friends from the General Accounting 
Office, Mr. Jeffrey Steinhoff, the Managing Director, Financial 
Management and Assurance, of the U.S. General Accounting 
Office. Mr. Steinhoff.

    STATEMENTS OF JEFFREY C. STEINHOFF, MANAGING DIRECTOR, 
  FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING 
    OFFICE; THOMAS R. BLOOM, DIRECTOR, DEFENSE FINANCE AND 
  ACCOUNTING SERVICE, DEPARTMENT OF DEFENSE; JO ANN BOUTELLE, 
   DIRECTOR OF COMMERCIAL PAY SERVICES, DEFENSE FINANCE AND 
 ACCOUNTING SERVICE, DEPARTMENT OF DEFENSE, COLUMBUS, OH; TINA 
   W. JONAS, DEPUTY UNDER SECRETARY OF DEFENSE FOR FINANCIAL 
 MATTERS, DEPARTMENT OF DEFENSE; AND MAJOR GENERAL EVERETT G. 
 ODGERS, COMPTROLLER, HEADQUARTERS AIR FORCE MATERIEL COMMAND, 
             WRIGHT PATTERSON AIR FORCE BASE, OHIO

    Mr. Steinhoff. Mr. Chairman, Ranking Member Schakowsky, I'm 
pleased to be here today to discuss DOD's use of canceled 
appropriations under the 1990 Account Closing Act. At the 
outset I want to make clear that the problems I will highlight 
today predate the current DOD Comptroller and his team, who 
have pledged to deal with the serious financial management 
problems that have plagued DOD for decades.
    The 1990 act resulted because of serious abuses in the use 
of old, expired appropriations, principally by DOD. Under the 
1990 act, once an appropriation has been expired for 5 years, 
it closes, and all remaining balances are canceled. It cannot 
be used for any purpose. Agencies may in only limited 
circumstances adjust accounting records for closed accounts--to 
correct clear-cut accounting errors. But, frankly, that should 
not happen very often, which, unfortunately is a big problem in 
DOD and largely why we're here today.
    From the enactment of the 1990 law through the end of 
fiscal year 1999, DOD reopened 333 closed accounts valued at 
$26 billion, and between fiscal year 1997 and fiscal year 2000 
made adjustments totaling about $10 billion to those accounts. 
By comparison, all other Federal agencies combined reopened 
only 21 closed accounts valued at only $5 million. We audited 
$2.2 billion, or over 80 percent, of DOD's reported $2.7 
billion in fiscal year 2000 adjustments to closed accounts. The 
fact that DOD made $2.7 billion of adjustments in fiscal year 
2000 alone shows a lack of adequate control over 
appropriations, which is one of the most fundamental financial 
management requirements.
    Compounding this problem, DOD had not put in place the 
systems, controls, and managerial attention needed to properly 
comply with the 1990 law. As a result, $615 million of the $2.2 
billion we audited, or 28 percent, were illegal or otherwise 
improper. For $108 million, the appropriation had already 
canceled when the disbursement was made, a clear violation of 
the Account Closing Act.
    For $38 million, the appropriation charge had not yet been 
enacted when the disbursement was made, which violates the 
Account Closing Act as well as other appropriations law. For 
another $364 million, the payments had originally been charged 
to correct appropriations and, therefore, did not meet the 
limited criteria to adjust a closed account. And, yet, for 
another $105 million, there was not sufficient documentation to 
support the adjustment that was made. Those were improper as 
well.
    Now let me share several examples of what we found. Ms. 
Schakowsky mentioned one earlier that involved the $79 million 
that was associated with the C-17. In this case the account had 
closed 4 months before the payment was made, and by moving that 
payment back to a closed account, it was a clear violation of 
the 1990 act. It was, therefore, illegal.
    For the second example, I've got a posterboard here that 
tries to explain this. These transactions are very complex. 
This is simpler than some of the others. When you collect money 
related to a canceled appropriation, you have a recovery. Let's 
say you overpaid a contractor and it led to recovery of funds 
related to a closed account. You are supposed to return those 
moneys to the Treasury Department. They go into what's called 
miscellaneous receipts. They then are under congressional 
control. That money is not available for agency use. In this 
case DOD had a recovery related to a closed appropriation 
account. They bypassed that appropriation account and credited 
that to an open account, meaning that was money that was free 
to spend.
    In another case, in order to pay a $685,000 invoice, DOD 
made $590 million of adjustments to closed accounts, $210 
million of which did not meet the criteria for adjusting a 
closed account. I mention this because you see the magnitude of 
the accounting transactions that go on. They had a payment they 
couldn't make to an open account, and to try to reconcile that 
payment, they had to go through a very complex, convoluted 
process that resulted in manyfold more in terms of adjustments 
than the initial transaction.
    We found that DOD became aware in 1996 that there were 
deficiencies in its account reconciliation system that could 
result in violations of the Account Closing Act. Although at 
the time DOD projected that the cost to fix the system was only 
$24,460, nothing was done until May 2001, and only as a result 
of our review. In addition, DOD contracting officials issued 
contract modifications that directed that oldest funds be used 
first, a practice that was followed regardless of whether the 
appropriation had canceled, and it was intended to use unspent 
funds from canceled appropriations.
    Overall, our audit results provide another reminder of how 
broken DOD's management systems are today and why 8 of GAO's 23 
high-risk areas pertain to DOD. I'm using the term management 
systems to decribe the problem, not financial management 
systems, because 80 percent of the information that Mr. Bloom 
and his team need to do their job comes from non-accounting 
systems. So we're talking about an overall management system 
issue.
    Our report contains a number of recommendations, including 
the need to immediately reverse the $615 million of adjustments 
that violated the Account Closing Act. In the short-term there 
must be accounting discipline to avoid similar problems going 
forward and personal accountability for any future breakdowns. 
The buck must clearly stop somewhere. An effective monitoring 
and accountability system must be in place.
    For the long-term--and this is the big challenge--there is 
an overarching need for fundamental financial management reform 
as part of a total transformation of DOD's overall business 
systems and operations. I am pleased that the Secretary and the 
Comptroller have stated their intention to do so and that plans 
are being developed to transform DOD's financial management 
systems. Ms. Jonas, here today, is really charged with 
achieving that.
    We need to look at the systems, policies, and procedures. 
I've got a couple of other posterboards here that I think I 
used last May, when I had the privilege of testifying before 
the subcommittee, and that the chairman alluded to in his 
opening remarks. You have a very complex set of accounting 
codes in DOD, but making it even tougher is that first two 
digits shown on the poster board under the caption ``A-C-R-N.'' 
You have multiple ACRNs on many contracts.
    One example in our report mentioned a $2.1 million payment 
that required the contractor to submit billing that had 487 
pages in order to spread the $2.1 million to 267 ACRNs. It's 
just a very difficult job for the Comptroller's operation to 
perform. It's a convoluted, broken process.
    The second posterboard I have here is the infamous spider 
chart that speaks volumes about DOD's contract and vendor pay 
system. This is DOD's chart. I want to make that clear. This is 
what they're saying is the environment they're trying to move 
away from. I think recognizing a problem is very important, and 
here they clearly recognize it.
    I'll point to that one system up in the top lefthand 
corner, MOCAS. That's the system that was involved heavily in a 
lot of the transactions that we reviewed as part of this audit 
for the subcommittee. And to show you the challenge, the first 
letter, ``M,'' represents mechanization. That was a high-tech 
word in around 1960-61, when this system came on line. So DOD 
is working with a system that's close to 40 years old. Maybe it 
never worked that well in the beginning. There's no real 
documentation for it, and it's just a difficult challenge. It's 
a world-class issue that they're facing today, and we're 
hopeful there will be, what I call, total transformation. The 
Comptroller General has spoken about this a couple of times, 
and DOD is going to have to look at the entire business process 
from stem to stern.
    Mr. Chairman, Ms. Schakowsky, this concludes my summary 
remarks. I will be pleased, when we get to the question-and-
answer, to respond to any questions you have.
    [Note.--The GAO report entitled, ``Canceled DOD 
Appropriations, $615 Million of Illegal or Otherwise Improper 
Adjustments,'' GAO-01-697, may be found in subcommittee files, 
or by calling (202) 512-6000.]
    [The prepared statement of Mr. Steinhoff follows:]

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    Mr. Horn. I thank the gentleman. We will now move through 
the panel and hold questions until we complete the 
presentations. Our next witness is Thomas R. Bloom, the 
Director, Defense Financial and Accounting Service of the 
Department of Defense. Mr. Bloom.
    Mr. Bloom. Good morning, Mr. Chairman and Congresswoman 
Schakowsky. My name is Tom Bloom and I'm the Director of the 
Defense Finance and Accounting Service. With me is JoAnn 
Boutelle, who is Director of Commercial Pay Services for DFAS 
in Columbus. I welcome this opportunity to discuss with you the 
complex process of contract reconciliation and the GAO's recent 
review of adjustments made with that process.
    DFAS has made some significant mistakes, and we recognize 
and generally agree with GAO that there have been, and to a 
lesser degree still are, procedural, systemic weaknesses in our 
contract reconciliation process, these shortcomings in the 
recording of adjustments to accounts that may be improper or 
illegal, as noted by the GAO in their report. We are taking 
specific, positive actions to ensure that, in partnership with 
our customers, we do the right things in the contract pay and 
reconciliation process.
    DFAS makes various types of payments on large, complex, 
multiyear contracts. DFAS-Columbus disbursed approximately $280 
billion on contracts during the 1997-2000 fiscal year 
timeframe. The payments are recorded against various 
appropriations in fiscal years that fund the specific contract. 
Contract closure, changes in liquidation rates, or revisions to 
overhead rates are just a few examples of acquisition business 
practices that result in adjustments to previous payments.
    The contract file and payment history are subsequently 
reconciled. The duration of many of these contracts is 
extensive and more information becomes available during the 
life of those contracts. At the time of reconciliation the 
payment is validated against information current at the time of 
reconciliation. It must be noted that often new or additional 
information is used during the reconciliation process that was 
not available at the time of the original payment. Adjustments 
are made as a result of the reconciliation process to ensure 
that the payments match the contract terms and conditions.
    Reconciliations are performed by DFAS, other DOD personnel, 
and support contractors. DFAS-Columbus adjusted approximately 
$25 billion in disbursements during the 1997-2000 fiscal year 
timeframe that resulted from contract reconciliations.
    We agree with the GAO recommendations for DFAS. Let me now 
address the specific actions and steps we at DFAS have taken to 
ensure accounting adjustments made during the reconciliation 
process are sound.
    First, we have revised our procedures to ensure that 
adjustments are posted only to appropriations that are 
available at the time that a payment was originally made.
    Second, we have conducted mandatory training for personnel 
involved in the reconciliation process to ensure that they 
clearly understand not only the adjustments procedures, but the 
appropriations law as well.
    Third, we have changed our contract reconciliation system 
to install changes that recognize and prohibit adjustments to 
fiscal year appropriations that have been canceled or not yet 
enacted at the time of the original payment. One of the systems 
is up and running as of May; the other system's change will be 
finished in September.
    Fourth, we're directing our accounting personnel to post 
all adjustments regardless of appropriation balances and take 
the appropriate action to report apparent violations of the 
Antideficiency Act to the military service or DOD agency 
involved. We will work cooperatively with our DOD and service 
customers to provide them the necessary information for their 
review or investigations, as appropriate.
    These actions we have put in place will give us a check-
and-balance process to ensure that adjustments resulting from 
the reconciliation process meet sound and prudent financial 
management practices. We are monitoring compliance with these 
requirements to ensure that invalid adjustments are identified 
and reversed, and we're taking a very aggressive stance in 
DFAS. When we find problems, we're addressing them very 
quickly. For instance, recently, we found some duplicate 
payments that were made. We immediately shut down the system 
and will not start it back up until we have discovered why this 
is happening and make sure that it doesn't happen in the 
future.
    We recognize the importance to our customers and to the 
American taxpayer of having reliable, credible financial 
information, and this obviously includes the proper recording 
of adjustments resulting from reconciliation actions on 
contracts. Mr. Chairman and Congresswoman Schakowsky, I assure 
you that the military and civilian employees of DFAS are 
accountable for their actions and, as their leader, I am the 
most accountable. We seek only to provide the best service. Our 
uniformed members and American taxpayers deserve nothing less. 
I assure you that we will make the necessary adjustments to our 
financial records and systems, and we have already examined our 
processes and put into place preventative measures that we will 
continually monitor.
    That concludes my remarks. Ms. Boutelle and I will be happy 
to answer any questions you all might have. Thank you.
    [The prepared statement of Mr. Bloom follows:]

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    Mr. Horn. We thank you, and we will now move on to Ms. 
Boutelle, who is the Director, Commercial Pay Services, Defense 
Finance and Accounting Service. Now are you simply backing Mr. 
Bloom up or----
    Ms. Boutelle. Yes, sir.
    Mr. Horn. You didn't have a written statement?
    Ms. Boutelle. No, sir.
    Mr. Horn. OK. We will have our next witness then, and that 
is Ms. Jonas. She is the Deputy Under Secretary of Defense for 
Financial Management, Tina W. Jonas. Please proceed.
    Ms. Jonas. Thank you, Mr. Chairman and Ranking Member 
Schakowsky. I appreciate the opportunity to come before you and 
discuss financial management reform within the Department of 
Defense, and specifically the recent General Accounting Office 
report on canceled DOD appropriations.
    Let me tell you that the Secretary of Defense and the Under 
Secretary of Defense Comptroller and I realize that the 
Department's financial management weaknesses are a very serious 
matter that must be addressed through comprehensive reform. 
Fundamental changes are required to reassure Congress and the 
American people that we are good stewards of the resources 
entrusted to us, and this is a priority of the Secretary, the 
Comptroller, and it is my highest priority.
    In order to accomplish some of those changes, the Secretary 
recently established a Department-wide financial management 
modernization program to develop a DOD enterprise architecture. 
When implemented, that architecture will provide a blueprint 
that will guide the building of an integrated financial 
management system that will help prevent inappropriate 
financial transactions. The fiscal year 2002 DOD budget 
includes a request for funding to begin this critical 
modernization effort, and we hope that the Congress will 
support that effort.
    With regard to the specific concerns in the GAO report, I 
must emphasize that the Department's policies are consistent 
with current statutes. Obviously, if the policies had been 
adhered to, the issues addressed in the GAO report would not 
have occurred. Unfortunately, they did occur, and we are 
performing a high-level review Department-wide to determine 
what processes and policies need to be changed, and this will 
include, as Tom has already mentioned, an internal review of 
the specific processes at the Department's DFAS accounting 
service, and where we've identified current weaknesses, we are 
moving out to correct them. For example, we have provided 
additional training to 200 DFAS personnel, and we are making 
required policy changes, modifying automated systems, and will 
take individual personnel actions where appropriate.
    In closing, Mr. Chairman, let me again stress that the 
Secretary and the Comptroller take these financial management 
weaknesses very seriously and are committed to aggressive 
financial management reform. We look forward to continuing to 
work with this committee and with other interested Members of 
Congress and look forward to your support of our reform 
efforts, and would be happy to answer any further questions.
    [The prepared statement of Ms. Jonas follows:]

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    Mr. Horn. We thank you, and now we will start in on the 
questioning. I would like to ask just a few questions of Mr. 
Steinhoff.
    Your report recommends the Defense Department, in essence 
immediately, reverse the illegal and improper adjustments that 
you identified. The report also says the Defense Department 
must ``immediately fix'' the system contract modification 
problems and inadequate policies and procedures identified in 
the report and which contribute to the abuses. How long has the 
Department been aware of your findings and recommendations?
    Mr. Steinhoff. As we performed our work, we did provide 
information to the Department regarding the 268 transactions 
audited, of which we questioned 154. So the times will vary 
from 3 to 6 to 8 months for those. Our draft report, with our 
full portfolio of recommendations, was provided to the 
Department about 2 months ago.
    Mr. Horn. What is the GAO's idea of months and half-years 
and all the rest? Because we are moving into another cycle now. 
What kind of expectations should we have from the Department of 
Defense on how fast they clean up this situation?
    Mr. Steinhoff. I think you must view this from both the 
long-and short-term perspective. In the short-term, I think 
it's very important that DOD put in place what I call a system 
of accountability. They're still going to have that overall 
poor system environment I mentioned in my opening statement. 
But what DOD has to do in the short-term is to very effectively 
carry out the range of actions things Mr. Bloom mentioned. 
There needs to be strict accountability and oversight during 
this short-term until there's clear proof that things are under 
control, that people are actually effectively doing these 
things.
    I would recommend things like approvals at various levels 
for a large dollar adjustment transaction; the $79 million 
transaction for example. There also has to be periodic 
monitoring. There has to be constant reinforcement. It can't be 
told to people once or twice what is expected.
    In addition, it will be important to have periodic 
reporting in this initial stage, both internally and to the 
Congress. I don't mean in perpetuity. We don't need another 
report, but at least until there's some feeling this is under 
control, reporting information such as the amounts and nature 
of adjustments, the status of actions to address underlying 
problems, and information on interim enhancements would enhance 
accountability. Another important control would be periodic 
audit.
    I know that we've been asked by this subcommittee and the 
House Budget Committee to do a followup review for fiscal year 
2001, and we will review the actions DOD has taken to address 
our recommendations. But I think maybe periodic audit by the IG 
after that is warranted, until you find out that this is really 
stabilized. Continuing congressional oversight is very, very 
important, knowing that this is important to Congress is a 
catalyst for action.
    Mr. Horn. Mr. Bloom, how much work has been done on this? 
When did you first see the GAO recommendations, and what have 
you done about it?
    Mr. Bloom. Well, I first was briefed on the GAO 
recommendations on April 12. I believe that there were members 
of my staff who had been briefed prior to that. When I was 
briefed, I was obviously concerned and immediately asked my 
staff what had we done and what were we doing at that point. At 
that point we had already implemented a fair number of manual 
controls--some of the approvals that Mr. Steinhoff talked 
about, trying to really pinpoint accountability on the manual 
process.
    They were also working at that time on systems' fixes, and 
I don't want to say that systems' can fix everything; they 
can't. You have to have good people, diligent people, doing the 
right things, trained people. So we took steps to train our 
folks in appropriations law. We've been bookkeepers for too 
long and not accountants, and many of our folks have the title 
of accountant and we've got to earn that and we've got to act 
like accountants. So we're training our people. We're 
professionalizing our workforce. We're adding the systems 
changes and adding accountability.
    Mr. Horn. Could you tell me to what degree is the Columbus 
operation of your group--we know that for about 6 years that 
they have always been one of the biggest headaches we have 
seen. Now to what degree have you straightened out the DFAS-
Columbus? You have referred to it, and I believe GAO referred 
to it.
    Mr. Bloom. I think you're absolutely right, Columbus has 
been a problem for years. One of the steps that I took soon 
after taking this job, I think it was February 2000, I changed 
the scope of responsibility, essentially broke that huge, that 
mammoth organization out there into two pieces, and then I 
changed executives. At that time JoAnn Boutelle came on board. 
She had actually been a deputy for a short time before that, 
but the most significant part, the contract pay part, this part 
we put JoAnn in charge. We think that's a significant positive 
thing. It's now the size that can be managed, and I believe 
I've got the right executive and she's moving to make sure that 
we've got the right managers.
    Mr. Horn. I now ask my ranking member here for 6 minutes or 
so. We will alternate, and then Major Owens will be next.
    Ms. Schakowsky. Thank you, Mr. Chairman. I have to tell you 
this infuriates me. I think the American people, if they really 
knew about this, would be infuriated as well.
    In 1996 we eliminated an entire welfare program which 
amounted to about $13 billion a year total for the whole 
program, Aid to Families with Dependent Children, because of 
perceived problems with that program. And, yet, if I am 
understanding correctly, since 1990, $26 billion has been 
allocated from these closed accounts. Is that right, Mr. 
Steinhoff?
    Mr. Steinhoff. Actually, that was the value of the accounts 
opened by DOD. I don't think there's a precise number. For the 
last 4 years there's been $10 billion.
    Ms. Schakowsky. OK.
    Mr. Steinhoff. But it's a very large number.
    Ms. Schakowsky. It's a very large number.
    Mr. Steinhoff. It's a very large number.
    Ms. Schakowsky. I mean, imagine, we have these huge debates 
about the National Endowment for the Arts. $100 million total 
is what are in budgets like that. So I think this is very, very 
significant. Besides, when we consider how this money could be 
spent even within DOD--and we are fighting to provide our men 
and women in uniform with adequate living standards, etc.--this 
is positively infuriating.
    What I am trying to understand is how rapidly we are moving 
toward correcting this. My understanding now is that the law 
has been broken repeatedly, but a violation of the act includes 
not sending over a report that a violation has occurred. Now 
the GAO sent its draft report to DOD 2 months ago, and I should 
note that DOD failed to respond to the GAO draft. Has the DOD 
yet sent a violation report to the President and the Congress? 
Has anyone been disciplined due to findings in the GAO report? 
Has anyone been disciplined under the Antideficiency Act since 
1990, when the law was passed?
    Ms. Jonas. Ranking Member Schakowsky, you're referring to 
the Antideficiency Act and whether or not there was a potential 
violation of that. There have been violations that have been 
reported. I have the Deputy CFO, Nelson Toye, with me. He may 
be able to have the number in his head. But, to date right now, 
we do not know specifically whether an ADA violation occurred. 
Part of what the Comptroller has ordered is an internal review 
of both the DFAS personnel and the Air Force personnel 
specifically with respect to that $79 million transaction. 
We're very concerned about that.
    Obviously, I alluded to making adjustments to or taking 
appropriate personnel actions. If there's any indication that 
an ADA violation occurred, we will get that to OMB, to the 
President, to the Congress, as soon as we know about it. So 
we're working to understand what happened on the transaction. 
The Air Force may want to comment on their specific 
investigation to date on the $79 million, but we're very 
concerned, as you are, about potential violation.
    Ms. Schakowsky. But a violation report has not been sent 
yet because it is still being----
    Ms. Jonas. Not to my knowledge, no. I have only been here a 
couple of months.
    Ms. Schakowsky. And I am only in my second term, but all of 
us have to take responsibility----
    Ms. Jonas. Agree.
    Ms. Schakowsky [continuing]. To the American taxpayers for 
things that have happened, even if it may not have been under 
our watch exactly.
    And in reference to that, you say in your testimony that we 
are going to develop a new Department of Defense enterprise 
architecture and that it will help prevent inappropriate 
financial transactions. I want to tell you something: Unless we 
are told something better than we think this will help to 
prevent these kinds of illegal--not just inappropriate but now 
we are hearing illegal--transactions, that is just not going to 
make it. It seems to me that you have to promise better than 
trying to help prevent these kinds of things.
    Ms. Jonas. I think the word ``help'' there is--Jeffrey has 
responded to this; this is a multifaceted problem. Systems can 
do so much, and we need to make appropriate enhancements, 
modernize these. We mentioned the MOCAS system that is over 40 
years old. What has not happened in the past is there's never 
been money devoted to actually modernizing these systems that 
are antiquated and cause the multiple transactions that 
increase the likelihood of errors, etc.
    But, to your other point, we intend to take swift, 
aggressive action, you know, hold our managers accountable. 
This is also a people, procedures, and policy issue. We fully 
agree with you; it's the systems--you can't blame everything on 
the systems. So we have to take a multifaceted approach to this 
financial management problem, and we intend to do so.
    Ms. Schakowsky. The GAO in the High-Risk Series Update that 
I had quoted says that, ``These problems have proven resistant 
to reform, in part, because underlying incentives''--
incentives--``have not been changed.'' So what are the 
incentives that need to change? Because it feels to me like 
that gets to more than systems, but maybe even a culture that 
needs to be changed. I don't know.
    Mr. Steinhoff. A lot of the challenge that the Department 
faces is a cultural challenge. DOD is largely a stovepiped 
operation with each service operating in their own way. You 
have stovepipes within services. You have OSD that has a 
different set of responsibilities. It's very rare, if ever, 
they ever do something in a joint manner. That accounting code 
I showed you earlier on the poster board was for one service. 
For the other two services, it's a different accounting code.
    There has really been no one focal point that is in charge 
for broad reform. There are certain elements that the 
Comptroller General, David Walker, has outlined that are very, 
very key. Transformation has to come from the top and, as I 
said earlier, we're most encouraged by at least the words so 
far from the Secretary. It has to come from the top. It has to 
include re-engineering, not just fixing what's wrong now, 
because the basic system is broken, but re-engineering the 
system, thinking outside the box, breaking down those 
stovepipes, changing the way folks behave on a day-to-day 
basis, and having something like a board of directors who would 
make corporate-type decisions over how DOD is going to operate 
in the financial acquisition personnel, and logistics worlds, 
all the way down the line.
    When I spoke earlier about 8 of the 23 high-risk areas, I 
could have focused on just the one, financial management, but I 
view these as all being intertwined. It's one set of management 
processes, and they haven't been viewed in that way in the 
past. I'm hopeful they're being viewed that way today.
    Mr. Horn. The gentleman from New York, Major Owens.
    Mr. Owens. Thank you very much, Mr. Chairman.
    Is there now going to be--well, let me just backtrack. Does 
West Point have any courses in accounting? There is some place 
where you draw on your personnel, personnel capable of handling 
this kind of mega-accounting job. Is that part of your system? 
Do you have a place to draw the human beings from who are going 
to be the accountants and the managers of the system?
    Mr. Bloom. We have an aggressive training approach, and 
we're implementing an aggressive recruitment approach.
    Mr. Owens. Well, what does that mean? You get your supply 
of bookkeepers and accountants from the same place as the rest 
of the marketplace?
    Mr. Bloom. Yes.
    Mr. Owens. But there's no place where you are training 
people and spending money for grants and really preparing them 
for this kind of accounting?
    Mr. Bloom. We actually are. We have a significant training 
budget, and we do do a significant amount of training in-house. 
I think last year we spent over $50 million training our folks. 
So we're focusing on it. We need to bring our folks up not just 
one notch, but probably two or three notches, through 
education, through training, and through better recruitment of 
folks.
    Mr. Owens. Are you comfortable that there is now a pipeline 
being established which will guarantee that you will have the 
people you need? Are you competing with private industry in a 
way that you are always going to have amateurs and new people; 
in terms of the personnel problems, they will always be there 
because there is no definitive pipeline that you have control 
of a set of incentives? What is the top salary for an 
accountant?
    Mr. Bloom. At a GS-13 level, I believe it's in the $75,000, 
$65,000-$75,000, depending on what part of the country----
    Mr. Owens. And you are competing with Wall Street and 
everyone else who has----
    Mr. Bloom. And it is tough, but, you know, there are folks 
who like the idea of serving their country and doing the right 
thing. We haven't exploited that to the extent that we can and 
will.
    Mr. Owens. Well, we have been in business for a long time, 
haven't we?
    Mr. Bloom. We have.
    Mr. Owens. Billions and billions of dollars; it is not a 
small agency. In previous years this committee has dealt with 
small agencies like the Department of Agriculture, which had 
$14 billion in uncollected loans out there, but their budget is 
nothing like yours. When you make a mistake, a 1 percent set of 
mistakes is huge, and on and on it goes.
    My problem is that we have not approached the problem with 
maximum assigned high priority to it: the training, the 
development of a system, like a few things here computers could 
have done. Now you have done it, I hope. There are certain 
things you can do with computers. I am sure you will do all 
those things or have done them, but I did hear somebody say 
that the system had not been funded properly. Can we assume it 
has been funded properly now to do the things you have to do, 
which are obvious, with computers, the things that are fixed 
and not human errors, not personnel-related? You have done 
those things now?
    Ms. Jonas. Well, the modifications that Tom was discussing 
with respect to these particular transactions, I think part of 
that has been completed. The additional part will be complete 
by September 30. The type of system architecture that I was 
discussing in my testimony is a really long-term problem, and 
it has to do with making the systems--you saw the current 
environment chart that GAO put up, and I actually think that 
expresses very well the kind of difficult challenge we have. 
But integrating these systems so that we don't have the 
multiple transactions and the potential for error, that's the 
long-term phase and that's why we've included funding in the 
budget to try to do that integrated architecture. They call it 
an architecture, a blueprint for how systems and transactions 
will work.
    Mr. Owens. Mr. Steinhoff, do these agencies talk to each 
other about these problems at all? Four years ago, I think 
there were reports that the CIA had lost in its accounting 
system $2 billion. A few weeks after that, they said, no, it's 
not $2 billion; it's $4 billion. Part of that related to the 
satellite reconnaissance systems and things which overlap with 
the Department of Defense. I assume that the CIA went to work 
correcting their problem 4 years ago, and the Department of 
Agriculture some time ago, when we had them here. Maybe they 
went to work, I hope, to correct their problem. Is there some 
kind of Federal across-the-board attention to the fact that 
management of finances ought to have a high priority and there 
ought to be things that are done on an ongoing basis systematic 
about all Federal agencies?
    Mr. Steinhoff. There are several mechanisms in place today. 
There's a chief financial officers' council, which was 
established under the CFO Act, where the CFO's meet I think 
roughly once a month. They also have various committees. 
There's the Joint Financial Management Improvement Program, 
which I now chair, which meets on governmentwide issues. You 
have the group in OMB, the Controller who under the CFO Act 
heads the Office of Federal Financial Management that 
spearheads financial management across the board. If you look 
at solving the kind of problems faced in DOD, I believe they 
are unique. Their setup is unique. The type of environment 
they're in is very, very unique. But there are those forums for 
sharing.
    I also will expand a little bit on the earlier issue you 
raised on human capital. That's a real crisis today. You got 
right to the nexus of one of the most important management 
challenges. Across government, in every area, this is something 
that will perhaps be cataclysmic at some point in time. Just 
talking about the accounting area--and this is a problem not 
just in government, but for private sector accounting--the 
number of accounting students at the college level has dropped 
by about 40 percent in the last couple of years. Kids really 
don't get excited about being a career accountant, I guess, and 
they're looking to more exciting things in life. This is 
becoming a real crisis.
    Mr. Owens. There is a really big, serious issue about a 
government initiative to guarantee you have the people to do 
the recordkeeping----
    Mr. Steinhoff. Yes.
    Mr. Owens [continuing]. Financial recordkeeping. I once 
headed an agency for New York City which had a mere $80 million 
a year to spend. Three-quarters of the problems and the crises 
that I was confronting from time to time related to fiscal 
recordkeeping, you know.
    Mr. Steinhoff. Yes.
    Mr. Owens. So do we need--it is far-fetched to say at West 
Point--do we need some major federally funded effort if not to 
establish our own academy, but to guarantee that there are 
incentives, scholarships, fellowships, and ways to get a ready 
supply of people who can manage these kinds of things? Because, 
as you said before, the whole welfare program could have run on 
your errors. Needless to say--the CIA lost track of $4 
billion--what we could have done with that.
    Mr. Steinhoff. You basically have to deal with a range of 
human capital initiatives that are now being considered. People 
have to use their existing authorities better than they do 
today. In addition, I think the Congress is considering a 
number of actions with respect to human capital.
    Also, Mr. Bloom may or may not agree here, but earlier he 
mentioned bookkeepers versus accountants. To the extent DOD can 
turn around its system it can move away from having as many 
bookkeepers or as many people trying to reconcile transactions. 
When one of every $3 of transactions is correcting or adjusting 
a previous transaction, when you have systems that require you 
to enter a transaction multiple times, and when you're entering 
literally millions of transactions unnecessarily, you end up 
having just an army of accounting clerks.
    Mr. Owens. Yes.
    Mr. Steinhoff. And you want to move toward fewer of those 
and many more people with high-end accounting and financial 
analysis skills, so that you're making the necessary analysis.
    Mr. Owens. My time is up, but I want to thank you, Mr. 
Chairman, for calling this hearing. Again, you are right on 
target in terms of many basic needs we have in terms of 
management. Thank you.
    Mr. Horn. I thank the gentleman.
    Let me get into this. We have some very able people here as 
executives with a very good background. I am going to start 
with you, Mr. Bloom.
    You have been the Chief Financial Officer at both the 
Department of Commerce and General Services Administration. 
What is the difference you see between those two agencies and 
what you are confronted with in the Department of Defense, and 
what could you tell us on that? The reason I ask that is, when 
we got into the Y2K bit back in 1996, 1997, 1998, and all that, 
I also got into some of the accounting. I said at the time 
that, if Secretary Forrestal, the first Secretary of Defense, 
had just wiped out every accounting system he had there and get 
a system that would work--and how many accounting operations do 
you have, how many different ones? Maybe Ms. Jonas can help us 
on that.
    Mr. Bloom. Well, let me start with, the first question is 
the comparison between the Department of Commerce and GSA and 
what we have at DOD. There are a couple of striking things 
that, frankly, caught me by surprise when I got here 2 years 
ago. You can talk about the size and you can read about how big 
DOD is, but until you've actually experienced it, this is a 
monolith. This is huge. So neither GSA or Commerce were 
anywhere near the size and complexity.
    The other thing is that some of the contracts that we're 
dealing with go back to the seventies, the early seventies and 
the mid-seventies. So we're dealing with very long-term, very 
large projects. The longer something exists, it's almost 
geometric how errors can occur, and we keep these contracts 
going for years and years.
    You know, as a former Inspector General, I kind of believe 
that if a contract is over 5 years, you ought to rewrite it. 
Now that causes the acquisition community heartache, I'm sure, 
because I'm looking at it from just an accounting standpoint. 
It might be interesting to hear what they would have to say 
about something like that.
    The other thing, since the contracts are so big and so 
long, are progress payments. We make progress payments along 
the way. That makes it increasingly more difficult and complex. 
I'm not trying to make excuses, sir, but it does make it more 
complex, and the sheer size and the stovepipes. You know Jeff 
Steinhoff mentioned the stovepipes. It isn't just the Air Force 
or the Navy who do things differently from one another; we do 
things differently in different parts of those services. So the 
question that you asked, how many kinds of different accounting 
groups are there out there, while there is one DFAS and we took 
a bold step 11 years ago to form DFAS, that was really just 
half of it. There are literally--and I guess I'd ask Nelson 
Toye--hundreds of other accounting functions out there in the 
services, in the defense agencies, and lots of room for 
consolidation and standardization.
    Ms. Jonas. Mr. Chairman, I would just add, the systems 
which we called non-financial feeder systems, which incorporate 
all the service systems that they use for inventory and every 
other system, I think there are about 200 that we have 
identified so far, and we're not positive that that's the 
bottom of the barrel. In fact, one of the efforts that we're 
currently looking at is getting a better inventory of these 
systems. It is enormous. It is just going to be a huge problem.
    We have to have the information. The data that flows from 
those non-financial feeder systems must be accurate as well. 
Tom's just got the financial end of it, but the data that flows 
into it has to be accurate in order to have integrity. I think 
we have our hands full, and that's why we had to go to a 
blueprint, or what they call an enterprise architecture, to 
just get a handle on what are we talking about in terms of the 
systems that are required to give the kind of trustworthy data 
that we need. Our budget request is about $100 million for 2002 
to begin this. So it's a fairly sizable amount that the 
Secretary has set aside to try to address this very serious 
problem.
    Mr. Horn. Well, I think, as everybody knows, we have a real 
problem in terms of human infrastructure, not just the 
machines, and we're losing thousands of people from the 
services, from the civilian side. I would hope that in this 
administration every single political appointee goes to some 
college so that they can make a speech as to the opportunities 
that one has. You never get the chance that you have in the 
services. They have more responsibility and they are 
responsible for millions of dollars worth of equipment and all 
the rest. We ought to make that challenge in some of the people 
that are graduated, both undergraduates and graduates. I would 
hope we would work that system and try to say, you know, 10,000 
people are leaving; we need 20,000 maybe or 15,000 to solve 
some of this.
    Ms. Jonas. Dr. Zakheim has been out, he has his doctorate 
and he is a very strong supporter of education, and we will 
take every opportunity, Mr. Chairman, Jeff has raised, and the 
Comptroller General has raised, with Secretary of Defense 
Rumsfeld many of these issues--in fact, did so, I think, last 
Friday. So we are very attentive to the issues that GAO is 
raising, and we're glad that they are raising them. It gives us 
the opportunity to try to address them.
    Mr. Horn. You are one of us on Capitol Hill. So how did it 
shock you when you went over there----
    Ms. Jonas. Yes, you're right, Mr. Chairman.
    Mr. Horn [continuing]. Since you were handling 
appropriations?
    Ms. Jonas. I worked on the health care accounts for Mr. 
Young and that was a shock. They had similar issues and 
problems. So I was somewhat aware of what I was walking into.
    Mr. Horn. Well, you should know all the ins and outs then.
    Ms. Jonas. Not all.
    Mr. Horn. And maybe in a couple more months you'll know all 
of the Defense Department's ins and outs.
    So what is the best way we can say to solve this problem 
now? Is it just putting people on it, Mr. Bloom, or what? What 
do you think? How can we get a plan moving to solve this thing?
    Mr. Bloom. We need a holistic approach. I grew up in 
Detroit, and I was a goalie in hockey as a kid. My job at 
Defense is kind of as a goalie. I am the last line of defense. 
But that isn't--we need to get the whole team working together. 
We need to get the forwards and the centers and the defensemen, 
and that's the acquisition community; it's the FM community 
throughout DOD. We all need to be working together on this. We 
haven't done a great job, frankly, of working together and 
taking the holistic approach. Certainly this report is going to 
help get our attention and force us to do that, to work more as 
a team, so that we're not relying on just one part of the team 
to make sure that the wrong things don't happen.
    Mr. Horn. Well, if you don't mind, General, I would like 
General Odgers to come forward so we can get a feeling for what 
goes on in the Air Force and how that relates to the overall 
defense situation. You've got a lot of talented people that go 
into the Air Force. I just wondered, what do you see as the 
kind of talent you are getting to help you in accounting 
situations and general housekeeping and administration, and 
whether your people coming out of ROTC, or whatever, can you 
get talented people to deal with that?
    General Odgers. Mr. Chairman, Ms. Schakowsky, I am Major 
General Everett Odgers, and I am the Director of Financial 
Management and Comptroller for Air Force Materiel Command--in 
lay terms, I'm the Chief Financial Officer. We're the parent 
command for the centers where most of these activities took 
place that are detailed in the GAO report.
    We do have a very difficult time recruiting and retaining 
qualified financial management personnel. We have teams we send 
out to the universities annually to recruit people, bring them 
into what we call our PALACE Acquire Program, which is a 3-year 
training program, to take their accounting and financial 
management degrees and grow them into useful Federal Government 
employees for our accounting and financial purposes. That 
program works very well, but it clearly does not bring on 
nearly the people that we need.
    As we work through all of the workforce issues that we have 
within the Department of Defense and in the Air Force, we 
continue to strive to find qualified people. It's an extremely 
difficult process. We are in competition with private industry, 
and it is very stiff competition. In many cases they win at 
some of the bigger and more prestigious universities where we 
would like to draw talent from, sir.
    Mr. Horn. Do you lose a lot of people after your 2 or 3 
years of helping them through college and this kind of thing?
    General Odgers. Our experience in the more lucrative 
employment markets, such as the area around Hanscom Air Force 
Base, Boston, MA, and Los Angeles near the Space and Missile 
Center, and areas such as that, we are in stiff competition and 
we tend to lose these people either to contractors who are 
working for us in some way or to private industry, sir.
    Mr. Horn. What can we do about it, anything else?
    General Odgers. We have worked with the Air Force, our 
command has, in workforce-shaping initiatives to find ways to 
better recruit people, through legislation or other activities, 
to offer bonuses to people as we recruit them so we can become 
more competitive with private industry and draw the talent that 
we need, sir.
    Mr. Horn. Let me move back to Mr. Bloom. I want to focus on 
following two specific cases. One adjustment charged fiscal 
year 1998 and 1999 appropriations for $21 million in payments 
that were made before these appropriations had been enacted 
into law. This is an obvious violation of the law and common 
sense. I wonder what you can tell me about this and the $21 
million, and where is it now?
    Mr. Bloom. It was just a mistake. JoAnn may be able to give 
more details. No excuse, sir.
    Mr. Horn. Ms. Boutelle is the Director, Commercial Pay 
Services, Defense Finance and Accounting Service.
    Ms. Boutelle. Yes, sir, and we receive adjustments from the 
services as well as from the staff that we have at Columbus 
performing reconciliations and from contractors. The particular 
one you're addressing, the $21 million, came in from the Air 
Force, and I would have to defer to General Odgers for any 
specifics on those adjustments. I can tell you that, where DFAS 
was wrong was that when those adjustments did come in and fed 
through our contract reconciliation system, we did not have an 
edit in place to catch them and bring them to someone's 
attention. That is one of the system fixes that we are working 
on.
    Mr. Horn. General, what about that $21 million in payments 
that were made before these appropriations had been enacted 
into law?
    General Odgers. Sir, clearly, the actions that were taken, 
the recommendations that were made by the Air Force people for 
those transactions were in error. We are in the process of 
correcting those entries, and as we do that, we go through 
looking at all of the ancillary accounts that are involved in 
this to determine whether there are any problems that will 
arise such as a negative account where we would have to go into 
an Antideficiency Act investigation. Clearly, we were in error. 
The internal controls that were in place, the management 
actions that should have taken place, did not occur, sir, and 
we need to fix that.
    Mr. Horn. Now is that going to be fixed within the Air 
Force or is it going to be fixed within the Department of 
Defense?
    General Odgers. We obviously are going to work with the 
Department of Defense, but on the Air Force's part we recognize 
that we need to take some very rapid action. We are very 
concerned. We consider this a significant setback in our work 
toward CFO compliance, as you've had hearings on this subject 
in prior years, sir.
    We have launched an intensive training program for our 
program managers, financial management people, contracting 
people, the contractors who work with us in this area, for our 
reconciliation agents, the people who sign off on many of the 
modifications. We want to go out and give them intensive 
training modeled after the New Start process that we went 
through last year after we ran into some very serious problems 
there. So we plan on going out, launching that program in the 
month of August, to give them refresher training in accounting 
for appropriations, particularly where canceled year funds are 
involved, to assure everyone understands the law and how the 
law operates.
    In the longer term we need to work with the Defense 
Acquisition University to try to get more accounting and fiscal 
law information into their courses for the financial managers, 
program managers, and acquisition people, and we are 
establishing, working with Mr. Speer, who is the Principal 
Assistant Deputy Secretary of the Air Force for Financial 
Management, limits for approval of these types of transactions, 
where up to $1 million the program manager has to sign off on 
them; from $1 million to $10 million, the center or 
installation comptroller will have to sign off; $10 million to 
$25 million comes to my office at the major command, and $25 
million and above will have to come to the Air Force. This is a 
process that we have for some other things. It works very well, 
and we think putting this in place for some period of time at 
least will get the system back under control, so that we will 
know what is happening out there, sir.
    Mr. Horn. In terms of the professionals and the support 
service on the financial side of the Air Force, how many do you 
have that are civilian? How many are Air Force?
    General Odgers. Uniformed members, sir?
    Mr. Horn. Yes.
    General Odgers. In my command--and I can only speak for Air 
Force Materiel Command; I do represent about 28 percent of the 
total Air Force--35 percent of the civilian population, and 15 
percent of the military population, sir.
    Mr. Horn. Now on the military side, if you have somebody 
that is really lousing things up, you can either not promote 
them or you can do a number of things.
    General Odgers. Correct.
    Mr. Horn. But you don't really have much power on the 
civilian side, I would guess.
    General Odgers. Sir, if in the process of investigating a 
transaction or some other activity that took place, if, in 
fact, it pointed to an impropriety or someone creating some 
illegal act, then there are administrative procedures that we 
certainly can take. The commander has the prerogative to deal 
with these people through administrative punishment up to and 
including dismissal from the service, sir, if it's serious 
enough.
    Mr. Horn. Well, would you say that you have better 
sanctions with the uniformed services than you have with the 
non-uniformed?
    General Odgers. I would not agree with that totally, if I 
might, sir, phrase it that way.
    Mr. Horn. Sure.
    General Odgers. We have equal ability to investigate any 
impropriety that occurs. Obviously, the military justice system 
is significantly different than it is on the civil service 
side, but both of those provide us the opportunity to prosecute 
people if, in fact, that is necessary--much swifter and quicker 
perhaps on the military side.
    Mr. Horn. When I go through the military side, I often 
remember that it used to be master sergeants and chief petty 
officers that could have easily fixed that up, and if they 
didn't, they had usually two books going anyhow. So whatever 
happened to those people? [Laughter.]
    General Odgers. I don't know, sir. We've lost a lot of 
them, I know that.
    Mr. Horn. Yes. Don't you wish we had them, right?
    General Odgers. Yes, sir.
    Mr. Horn. OK, one more example now, Mr. Bloom: The second 
adjustment resulted in shifting to other accounts $210 million 
in payments that had been charged correctly in the first place. 
In other words, this adjustment managed to convert $210 million 
of the correct charges into accounting errors. How are we going 
to handle that one?
    Mr. Bloom. Well, again, in the short-run, we need to look 
at every one of those transactions and figure out why we did 
it, why it got by us. In the long-run, having better managers, 
having better trained people and the systems enhancements--I 
mean, not only were these unnecessary, but they were costly. In 
other words, it costs us more money to do the wrong thing, and 
from an efficiency standpoint that was bad. It's really the 
same tack. We just need to be better accountants. We need to do 
a better job, sir.
    Mr. Horn. I am going to yield the rest of the questions to 
the gentlewoman from Illinois, Ms. Schakowsky.
    Ms. Schakowsky. Thank you, Mr. Chairman. Unfortunately, I 
think I have more questions than time, but I do want to make a 
couple of points.
    Ms. Jonas, your predecessor reported, I guess to the Armed 
Services Committee, or it was said to them that the DOD can't 
account for $40 to $50 million each and every day. That is a 
lot of money. You talked about $50 million for training in a 
year. That is a lot of money, too. But to not be able to 
account for that much money is completely and totally 
unacceptable. I look at that spiderweb and it doesn't surprise 
me that people, regardless of pay, might be reluctant to step 
into the middle of that. I mean, who would want to be in a 
systems environment that looks anything like that? Yes, maybe 
you could put that up. I mean, I don't know what salary would 
encourage me to step into that.
    The way I deal with spiderwebs is I knock them out. And 
trapped in that spiderweb are billions and billions of taxpayer 
dollars right there. Now that is an insult to the spider no 
doubt, and in this case probably a lot of spiders that are in 
there creating that web, but, clearly, we need to do that.
    But the question--and everyone acknowledges that, but it's 
always in--I don't know what you call that part of speech--``We 
are working toward,'' ``We are in the process of.'' If we were 
to call you back in 3 months, what could we expect is going to 
be different from what has happened? Anyone can answer that.
    Ms. Boutelle. Well, I can say from the DFAS-Columbus 
systems problem that there were--what--35 of the transactions 
that were in that illegal category, where we adjusted to an 
appropriation that was canceled at the time or not enacted. The 
system changes, we put in one that went in in May and that has 
fixed the backward move. Now there's a few little problems with 
it that we're working to resolve.
    And then the fix to----
    Ms. Schakowsky. That is a scary thought, but OK, fix them.
    Ms. Boutelle. We are. We are.
    Ms. Schakowsky. Those little mistakes end up being $21 
million here and $40 million there.
    Ms. Boutelle. Absolutely. Then the fix for the moving-
forward adjustments, that's the one that the developers are 
programming and will be testing and have that in place by the 
end of September. So these 35 transactions that got through 
will be caught and will not be allowed to go through. So in 3 
months we will definitely be able to tell you those fixes are 
in the system.
    The other thing that we're doing, we have trained a lot of 
the reconcilers that are government employees as well as 
contractors on appropriation law and on the specifics of these 
situations. We plan on having the rest of them trained by the 
end of September, so that they will also be knowledgeable. 
Hopefully, then, with the system fixes as well as the 
knowledge, we won't find reoccurrences of these problems.
    General Odgers. Ma'am, if I might add to that?
    Ms. Schakowsky. Yes.
    General Odgers. Working with Ms. Boutelle, the actions that 
we're putting in place, I would like to believe that once we 
get the process in place where these actions have to be 
certified by people above the program office, she won't see 
very many of them and her systems won't have to catch them.
    Ms. Schakowsky. And that will be when?
    General Odgers. That will be immediately. So 3 months of 
now, the number of transactions that she sees that are improper 
should not exist. I mean, they will not be there.
    Ms. Schakowsky. Mr. Steinhoff.
    Mr. Steinhoff. I think in 3 months you'll see a number of 
the short term actions that I referred to in my opening 
statement to deal with this immediate problem that led to the 
illegal and improper transactions. Your spiderweb will still be 
alive and well. It will be alive and well for a number of 
years. This is a world-class challenge. Ms. Jonas mentioned the 
systems architecture for all the business systems in Defense. I 
think you're talking somewhere on the order of 7 years or more 
before they're able to really get their systems in shape. 
That's just a very rough guesstimate.
    Ms. Schakowsky. Ms. Jonas, how does that number sound to 
you?
    Ms. Jonas. The Secretary of Defense wants us to have this 
done in 6 years.
    Ms. Schakowsky. OK.
    Ms. Jonas. But I don't know that's possible, but we must 
strive to make clear near-term--within, you know, less than a 
decade--processes.
    Mr. Steinhoff. And the holistic approach that Mr. Bloom 
mentioned before is really what is needed because, if you look 
back over time, the road in Defense is littered with billions 
and billions of dollars of systems development efforts that 
were well-intended going in with high hopes, and they just 
didn't work real well. In part it was because they were done in 
a stovepiped manner without a clear set of blueprints for how 
they fit in with something else. So this transformation that 
the Secretary is beginning is very important, and the control 
over those appropriations for systems and the wise spending of 
the moneys will be very important to make his 6-year goal.
    Ms. Schakowsky. And I think, Mr. Chairman, your efforts to 
continually engage in this kind of oversight activity is 
equally important to make sure that it is clear to everyone 
that someone is watching. Thank you very much, Mr. Chairman.
    Mr. Horn. Well, thank you and we appreciate the questions 
you have asked, and we will make sure you ask a lot of others 
in the months to come.
    I might add that wonderful chart of the General Accounting 
Office could conceivably come out of the papers of science and 
administration and Grykunus' chart, for those of you that read 
those books in the thirties, forties, and fifties, but it is a 
geometric move and it is very difficult to take those and 
figure them out.
    We've got to find a way to stop this practice, and I hope 
that the people from the Department of Defense will really 
focus on this because I am going to hold a hearing about 3 
months from now on this and see how far you have come. Closed 
accounts should be closed accounts. If any one of us wrote bad 
checks, they would bounce. If we intentionally wrote those bad 
checks, we would land in jail. That apparently doesn't apply to 
the government's largest agency. Over and over, Congress 
receives reports of departments and agencies violating Federal 
financial management laws and nothing seems to happen. 
Likewise, nothing changes.
    There is another law on the books, as Ms. Jonas notes, 
called the Antideficiency Act, and it is not enforced often. It 
is time to re-examine them now.
    We will send you some questions we would like for both the 
minority and the majority. So we would like to know where you 
are, and then 3 months from now we will be back here.
    I want to thank all of you for coming. I want to thank our 
staff: J. Russell George, right behind me, the staff director/
chief counsel; Bonnie Heald, next to him, director of 
communications; Henry Wray, on my left, senior counsel in 
putting this together; Scott Fagan, assistant to the 
subcommittee; Chris Barkley, staff assistant; Davidson Hulfish, 
Samantha Archey, and Fred Ephraim, interns; and a hard-working 
young intern, Fariha--it is Fariha's last day with the 
subcommittee as an intern. Where is she? There you are. Thank 
you. She is one of our best interns. And then Christopher 
Armato, another intern.
    And the minority staff: Michelle Ash, the minority counsel; 
Jean Gosa, minority clerk. And Geri Lyda, the court reporter.
    Thank you very much, and we are adjourned for 3 months.
    [Whereupon, at 11:30 a.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
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