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FINANCIAL MANAGEMENT REFORM
Department leaders continue to implement the most comprehensive reform of financial management systems and practices in DoD history. Reforms aim to streamline and redesign DoD financial processes and organizations in order to make them optimally effective and to cut costs. Reforms also seek to ensure that DoD financial management fulfills the needs of its leaders, satisfies statutory requirements, minimizes the potential for fraud, and provides superior customer service.
These reforms are summarized in the Departmentís Financial Management Improvement Plan. This plan merges previous initiatives with new ones into a single comprehensive plan and responds to congressional concerns.
REFORM AND CONSOLIDATION OF FINANCIAL MANAGMENT OPERATIONS
The Defense Finance and Accounting Service
Since its activation in January 1991, the Defense Finance and Accounting Service (DFAS) has been the Departmentís pivotal agent for financial management reform and consolidation. DFAS now processes a monthly average of nearly 10 million payments to DoD personnel; 1.2 million commercial invoices; 600,000 travel vouchers/settlements; 500,000 savings bond issuances; and 122,000 transportation bills of lading, with monthly disbursements averaging $24 billion. Through consolidation and process improvements, DFAS has generated savings in operating costs totaling about $1 billion since 1991.
By consolidating over 330 financial management field sites into five DFAS centers and 18 operating locations, the Department was able to eliminate redundancy and unnecessary management layers, facilitate standardization, improve and speed up operations and service to customers, increase productivity, and enhance financial management support to DoD decision makers. All this was completed by July 1998, almost two years ahead of the original schedule.
Expanding Competition to Improve Services and Reduce Cost
DoD financial managers are participating in the Administrationís effort to use competition within the government and with the private sector to improve support services and save money. Changes implemented as a result of competition studies produced annual savings of $23 million through the streamlining of administration operations, facilities, logistics, and the consolidation of debt and claims management and Defense Commissary Agency (DeCA) vendor payments. Anticipated changes resulting from ongoing studies in DeCA accounting, depot maintenance accounting, transportation accounting, civilian payroll, and military retiree and annuitant payroll are projected to save an additional $25 million annually.
Consolidation of Finance and Accounting Systems
DFAS manages two types of DoD financial management systemsófinance and accounting. Finance systems process payments to DoD personnel, retirees, annuitants, and private contractors. Accounting systems record, accumulate, report, and analyze financial activity. As of October 1998, 109 finance and accounting systems were operatingódown from 324 in 1991. Finance systems have been reduced to 18, with a goal of 9 by 2003. Accounting systems are down to 91, with a goal of 23 or fewer by 2003.
The Departmentís consolidation of finance systems includes:
∑ Defense Civilian Pay System (DCPS). Nearly one million civilian payroll accounts were transferred to DCPS. Some 26 separate systems were eliminated and 348 payroll offices closed.
∑ Defense Joint Military Pay System (DJMS) and the Marine Corps Total Force System (MCTFS). By the end of FY 2001, DJMS will be fully implemented and all service members will be paid by either DJMS or MCTFS, eliminating an original 22 pay systems.
∑ Defense Procurement Payment Systems (DPPS). DPPS is being developed as a standardized DoD contract and vendor payment system. Additionally, a standard disbursement system is being developed to replace seven existing ones.
STRENGTHENING INTERNAL CONTROLS
Eliminating Problem Disbursements
A problem disbursement occurs when an expenditure has not been reconciled with official accounting records. DoD problem disbursements, once totaling $34.3 billion, have been reduced to $8.1 billion as of August 1998. Virtually all expenditures involved were proper and made only after a Department official confirmed that the subject goods or services were received and that payment was in accordance with a valid contract. That notwithstanding, DoD has an extensive effort under way to improve its disbursement process.
Prevalidation, the procedure of matching a disbursement to an obligation before (rather than after) a payment is made, has helped to reduce problem disbursements. Thresholds for applying prevalidation have been established at each DFAS center. To eliminate problem disbursements, thresholds for applying prevalidation are being gradually lowered until all payments are prevalidated.
Contract overpayments are never acceptable, but they occasionally occur. In FY 1993, overpayments on major weapons systems contracts were $592 million; by FY 1998, they had been reduced to $101 million. This reflects an accuracy rate of 99.8 percent.
Reforming the Contractor Payment Process
The Defense Contract Audit Agency (DCAA) now allows direct submission of vouchers to DFAS by qualifying and approved contractors. This reform will save substantial auditor time without putting accountability at risk, since DCAA will continue to provide oversight through periodic checks. The change also facilitates the transmission of contractor voucher payments using Electronic Data Interchange, another source of savings and efficiency.
For several years, DCAA has cut costs without hurting accountability by reducing its audits of low risk contractors (those with good audit histories and no more than $5 million of annual reimbursable contracts). Such contractors are subject to audit only once every three years on a sampling basis. Because of DCAAís favorable experience with this reform, contractors with up to $10 million of annual reimbursable contracts will now be considered for this sampling program.
To speed up audits and expedite the closeout of contracts, DCAA has begun concurrent auditing for contractors with good internal controls. By auditing transactions soon after they occur rather than after the end of the contractorís fiscal year, DCAAís work can be completed sooner, overhead rates settled more quickly, and contracts closed faster.
Computer Security and Fraud Detection
DFAS and other DoD organizations continue to cooperate in implementing better computer security and fraud detection and protection measures. Efforts include improved employee fraud awareness training and better controls to reduce vulnerability.
Auditable Financial Statements
As part of the Presidentís initiative to achieve unqualified (clean) audit opinions on its financial statements, the Department is taking aggressive action. Implementation strategies, including new policies and processes where appropriate, are being employed to produce financial statements that meet newly established federal accounting standards. The Departmentís effort involves the DoD financial and nonfinancial communities, DoD Inspector General, Office of Management and Budget, and General Accounting Office.
Reform Reporting and Valuation of Inventory
The Department is taking aggressive action to improve how it accounts for inventory. Enhancing inventory management systems to capture accounting information better will provide better inventory valuation, more reliable costing of goods sold, and other elements that enable more accurate assessment of net operating results.
Reporting and Valuation of Real and Personal Property
DoDís accounting systems were not designed to account for and report on the value of the Departmentís real and personal property. Instead, financial information for these assets is obtained from various property data systems, which for the most part are not integrated with DoDís accounting systems. To help achieve the needed integration, the Department has been migrating some of its property management systems to its new Defense Property Accountability System (DPAS). The remaining property systems are either being modified to integrate them with DPAS or changed to connect them directly to applicable DoD accounting systems and make them compliant with federal standards.
ADOPTING BEST BUSINESS PRACTICES
A critical aspect of the Departmentís financial management reform is to exploit successful business practices from both the private and government sectors. The goal is to make DoD business practices simpler, more efficient, and less prone to error. This is being achieved by the revision of existing policies and procedures and the increased standardization, consolidation, capabilities, and compatibility of existing systems.
Improving the Exchange of Financial Information
DFAS is promoting the paperless exchange of financial information through:
∑ Electronic Document Management (EDM) and World Wide Web Applications. One such application is Electronic Document Access, which enables on-line real-time access to documents needed to perform bill paying and accounting operations. Contracts, government bills of lading, and payment vouchers can be stored in an electronic file cabinet and shared between DFAS activities. Another application avoids unnecessary printing of reports by converting them into electronic format for on-line analysis, reconciliation, and reporting. EDM technology is also being used to enhance the control and management of documents needed for bill paying operations, regardless of the format of the document.
∑ Electronic Funds Transfer (EFT). EFT is reducing the cost of disbursements. Over 94 percent of DoD civilian employees and military members paid by DoD have their pay directly deposited into their accounts. The direct deposit participation rate for travel payments is now up to 80 percent. In 1998, 74 percent of major DFAS contract payments were by EFT. This accounted for 89 percent ($63 billion) of total contract dollars disbursed. This percentage is expected to continue increasing.
∑ Electronic Data Interchange (EDI). DFAS is using EDI to send remittance information directly to vendors and is currently working to receive and process EDI contracts and contract modifications into finance and accounting systems.
Electronic Audit Working Papers
Audit working papers are key components of audits performed by DCAA. They document DCAAís audit work and are sometimes shared with the customer as backups for audit reports. DCAA recently implemented an automated working paper process to make its audit services better, faster, and cheaper. As a result of this reform, DCAA can serve customers and obtain feedback on their services faster, helping to reduce the cycle time for negotiations. DCAAís new working paper process also supports DoDís efforts to improve the procurement process and will help achieve DoDís overall goal to become paperless by 2000.
DFAS continues to reengineer the processes by which the Department garnishes the pay of its civilian and military personnel for child support, alimony, commercial debt, and divisions of retired pay. The consolidated garnishment operations process approximately 11,000 garnishment orders per month. Reengineering has reduced staffing requirements significantly and will save about $19 million between 1995 and 2000. The cost of processing cases has already dropped from $153 to $79 per case honored. These savings are attributable mostly to technological improvements, most notably the introduction of EDM and direct linkage to DoD pay systems. Efforts are also underway to implement a system for electronic acceptance of court orders.
The Department continues to reengineer its management of travel by DoD personnel. The goal is a more efficient travel system that supports DoD requirements and provides excellent customer service. Procedures have been simplified and refined as a result of extensive analysis and pilot tests. Implementation of DoDís new travel processes will start in 1999 and extend over three years.
New DoD travel policies include:
∑ Delegation to appropriate officials of the authority to approve exceptions to standard travel policies.
∑ Expanded use of a government-sponsored, contractor-provided travel card to pay for all expenses related to official business travel (travel advances, tickets, taxis, lodging, meals, etc.).
∑ Expanded use of electronic transfer to process reimbursements.
Transportation Documentation and Financial Processes
With cooperation from the commercial transportation industry, DoDís transportation and financial communities have developed a far-reaching plan to use purchase cards and commercial documentation to reduce the data needed for the Department to procure and pay for transportation services. DoD officials are refining this fundamental change from past practices and expect to begin full implementation during FY 1999.
To achieve the goal of a paperless process, DoD leaders worked with the Departments of Commerce and Energy and the General Accounting Office to develop a software specification that creates a digital signature that is compliant with federal standards. The software specification enables the Department to move to paperless processes. Users will be allowed to sign documents electronically. This process will be pilot tested and eventually exported to other functional areas.
DFAS is establishing the Corporate Information Infrastructure to support use of common data elements for the collection, storage, and retrieval of finance and accounting data; use of common transactions; and movement of common transactions and data among systems. Also supporting reform is an ambitious effort to standardize and share acquisition data. This effort will greatly improve the interactions between DoD procurement systems and the financial systems that process and account for payments of procurements.
DFAS is working toward ensuring that all its systems are Year 2000 (Y2K) compliant well before the deadline. Consolidation of DoD finance and accounting systems substantially reduced the cost of fixing their Y2K problems. Repair of DFAS systems that require Y2K-related renovation is estimated to cost about $49 million. DFAS also provided $7 million to other DoD organizations to fund Y2K work on co-owned systems and is conducting planning and testing as part of this effort. All new DFAS systems are Y2K compliant.
The Departmentís financial management reforms are continuing to cut costs and improve effectiveness by exploiting the best of private and government practices. Especially productive are the imaginative utilization of consolidation, standardization, simplification, advanced technology, and practical common sense. Progress is fundamentally transforming DoD financial activities, as well as other activities with which they must interact.
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