Accounting & Tax

DoD Finance: Mission (Not) Accomplished

Two decades of failed Pentagon financial reforms have put more than just dollars at risk.
Kris FrieswickOctober 4, 2004

Can the world’s largest business organization finally approach the transparency and integration of its private-sector brethren?

Complicating financial reforms at the Department of Defense, of course, are other challenges the DoD must meet, starting with the Iraq War and encompassing questions about its Halliburton relationship, Air Force-Boeing tanker-plane contracts, and revolving-door employment agreements involving government personnel, to name just three.

But while the Pentagon’s size and complexity may excuse some of the financial-reform failures of the past 20 years, the core problem is more fundamental. “The department has never come to grips with what it is,” says Dov Zakheim, DoD comptroller from 2001 to 2004 and now a partner and vice president at Booz Allen Hamilton. “You’ve got this fundamental dichotomy that the department has never really been able to resolve for itself.” It was Kennedy Administration Defense Secretary Robert McNamara, a former Ford Motor Co. president, who first envisioned the Office of the Secretary of Defense as a corporation, with the military services and agencies as its profit centers, notes Zakheim. The services, meanwhile, tend to see themselves as independent corporations, with the OSD as their holding company.

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The chief goal of all the financial-management initiatives has been not just a clean audit, but some transparency at this huge bureaucracy. Prior reforms all died on the vine because they couldn’t dent the impregnable walls the military services and agencies have built up around their processes, procedures, and chains of command.

Congress is also at fault. In the main, senators and representatives want to overhaul DoD systems for the national good only so long as the change doesn’t interfere with their ability to steer contract-spending to constituents. Real reform would profoundly disrupt that time-honored tradition. Financial-management reforms have also failed because, despite the big talk at their inception, turnover in senior positions has meant inconsistent leadership.

Although some of the previous efforts probably “have resulted in some marginal improvements,” says Greg Kutz, the GAO’s director of financial management and assurance, “they certainly haven’t transformed the way the department does business.” Their value, he adds, has amounted to far less than the billions of dollars that have been spent on them.

Instead, each investment in reform ended up establishing ever larger, more expensive financial and management systems, most created at the service and agency level for their exclusive use. What’s left is a largely ineffective congregation of siloed financial and business-management systems.

The total number of Pentagon systems is conservatively estimated at more than 4,000, including at least 542 accounting and finance systems, 143 acquisition systems, 210 planning and budgeting systems, 665 human-resources systems, 565 logistics systems, and, ironically, at least 3 systems for inventorying all these business systems. In fiscal 2004, which ended September 30, the DoD spent $19 billion just to maintain and upgrade all the parts of these systems — $5 billion on modernization alone. Only a handful of these are interoperable, and many of them still rely on manual reentry of data between systems rather than electronic integration. (For more, see CFO magazine’s October 2004 cover story, “Losing Battles.”)