tv Pentagon Audit and Business Operations CSPAN March 9, 2018 8:01pm-9:47pm EST
in washington, d.c. and around the country. c-span is brought to you by your cable or satellite provider. tonight on c-span3, a senate hearing on military spending and an audit at the pentagon budget. ohio govern john kasich delivering his annual state of the state address and transportation secretary elaine chao discussing the trump administration's infrastructure plan at a house hearing. congress has ordered the pentagon to conduct an internal financial audit which they began last year. defense department officials testified on capitol hill about the audit process. senator mike enzi chairs this hour and 45 minute budget committee hearing.
>> good morning. i'll call this hearing to order. welcome to the senate budget committee hearing on the ongoing department of defense audit and pentagon business operations reform. our nation faces grave threats abroad and a challenging fiscal situation at home. given these dual pressures, rebuilding the military and reforming the way the pentagon does business must go hand in hand. as defense secretary james mattis said, the heart of our competitive edge is reforming the department and gaining full value from every taxpayer dollar. so i commend the secretary for launching a bowl refold reform .
reemphasize that the pentagon began it. the department consolidating. this is good news. the bad news is that we've all followed the recently publicized defense logistics agency finding of nearly $1 billion in inaccuracies. as the department-wide audit continues, there will surely be more painful findings, but this shouldn't deter our efforts. that's the purpose of an audit, to find things that need to be corrected and to save money by correcting them. we know a successful pentagon audit will take time. it will also require sustained congressional oversight and a renewed commitment to accountability at the department. checking the box by completing the audit is not enough. the goal must be improved financial management and business operations. the audit will empower managers to make better decisions with more accurate financial
reporting systems and data. for our troops, it will be better decision-making and that will mean more money for critical equipment and training. for our part, congress needs to step up its oversight of the consolidated audit and support its findings, but we need the department's help to better understand the process. many of my colleagues on the senate armed services committee share my view. several of them also serve on the budget committee. and members of this committee know the cost matters, too. the defense department audit will cost almost $1 billion this fiscal year alone. now, i did ask some questions, and i want to thank the department, and particularly mr. norquist for a speedy response. we're not used to that. but really appreciate it. and i did -- was interested even in the costs of the audit and noticed in the explanation that of the $918 million that are being spent on it that $368
million are for remediation. so that's for solving the problems that are in it. and there is also $135 million for financial system fixes and another $48 million for internal control, which is all-important. so actually, in my opinion, the audit is $367 million. the rest is benefits that we get out of it by doing the fixes that are necessary. but that's why congress needed a full breakdown of the projected audit costs. the department also should provide an explanation of how it's ensuring the independence of its contracted auditors and we need to know how the department plans to remedy any problems they find. gaining insight into which problems the pentagon is fixing and why will motivate congress to continue supporting the
audit. there may also be instances in which additional funding up front can avoid increased costs later on and we need to plan accordingly. ultimately reforming the pentagon requires more than an audit. defense spending is now higher than at the height of ronald reagan's presidency, but we aren't seeing the same value for each defense dollar spent today. ineffective business processes may be a big reason. the pentagon will never operate like a business, but it still must reform its business operations. the department's management culture, which has taken hold over the course of several decades, frustrates everyone, including its employees and many of its senior leaders. notably, the department has yet to implement a modern workforce management system, and i share my colleague senator john mccain's ongoing concern over the department's inability to tell us how many contractors work there. even more troubling, the department does not possess adequate reporting systems to measure the impact of ongoing
reforms from workforce changes to the adoption of shared services and cloud-based i.t. systems. i am pleased, however, that the deputy secretary of defense has built a reform management group to oversee the development of such issues. mr. gibson is the department's first chief management officer. will have the unique opportunity to lead in this area. it's my home we can build a mutually beneficial working relationship to help you achieve your goals. managing the pentagon is a difficult task, but it is crucial to our nation's defense and to ensuring that we spend america's tax dollars wisely. mr. gibson and mr. norquist, thank you for joining us today and for your service. i look forward to continuing the discussion. senator sanders? >> thank you very much, mr. chairman. let me thank our guests for being with us. the chairman and i don't agree on a whole lot of issues, but i think on this one we probably
do. the department of defense receives far more money than from the taxpayers than any other governmental agency. we now as a nation, as you know, spend about -- we spend more money than the next ten -- 12 nations in the world combined. and the congress against my vote decided to add another $165 billion to the pentagon over the next two years. and yet alone, among all agencies of government, the pentagon has not been able to perform an agency-wide audit. interestingly enough, mr. chairman, you may recall this, that the day before 9/11, the day before 9/11, in 2001, secretary of defense donald rumsfeld remarked that the pentagon could not properly
account for some $2.3 trillion in transactions. needless to say, his remarks did not get a lot of attention, given what happened the following day, but that was back in 2001. rumsfeld talking about $2.3 trillion in transactions that cannot be properly accounted for. and we have seen some recent audits that tell us interesting things. the commission on war time contracting in iraq and afghanistan concluded in 2011 that $31 to $60 billion spent in those two wars had been lost to fraud and waste. similarly, in 2015, the special inspector general for afghanistan reconstruction reported that the pentagon could not account for $45 billion in funding for reconstruction projects, and more recently, on audit conducted by ernst & young
for the defense logistics agency found it could not properly account for some $800 million in construction projects. i want to thank chairman enzi for your letter to secretary mattis last month, when you said, and i quote, "taxpayers must have trust and confidence that their hard-earned dollars are being spent wisely. if such trust and confidence cannot be built and justified, it will be incredibly difficult to achieve the 3% to 5% growth in defense spending you have identified as necessary to meet mission requirements." end of quote. i agree with the chairman that it is essential that the pentagon demonstrates that it is trustworthy and accountable with taxpayer dollars. that has not been the case. and that is why i was disappointed to read that the pentagon buried a defense business board report from 2015 which recommended ways to eliminate some $125 billion in bureaucrat waste.
i don't think there is any debate among anybody here that we want to be able to defend our country, that we want to make sure that the men and women in the armed forces have all of the equipment they need to protect their lives, but i would hope nobody here believes just because this is the department of defense we will defend an enormous amount of bureaucrat waste. one half, i think the chairman touched on, one half of the pentagon's budget goes directly into the hands of contractors and of that amount 1/3 or about $100 billion goes to the top five defense contractors in the united states. all of which, by the way, have been convicted or settled lawsuits related to fraud or misconduct against the federal government. all right? so we're dealing with huge defense contractors who have been involved in fraud against the federal government. also, i might add, and later on i'm going to have to -- i apologize, i'm going to have to run out, but i will come back.
i'd like to get a response from our guests today about the fact that the ceos of the top five defense contractors in the united states made a cumulative $96 million in compensation. five ceos, whose agencies are significantly funded by the federal government, the ceos of those defense companies made $96 million in compensation. back in 2011, i requested a report from the pentagon which detailed how the department paid $573 billion over ten years to more than 300 contractors involved in civil fraud cases against the federal government. there are a lot of issues here and your job is not easy. i mean, the size of the pentagon and the complexity of the budget is enormous. nobody here thinks you're going to solve the problem
immediately, but your job is to tell the american people how our tax dollars are being spent, to tell us, in fact, where the money is going. i'm not quite sure that we know where the money is going. to tell us why it is that we continue to do business with defense contractors who give us cost overrun, cost overrun, cost overrun. are we negotiating effectively or are defense contractors simply coming in saying we'll do it for "x" and it ends up being "3 x" and nobody cares. i look forward to the question period, but at this moment i have to run out. thank you very much for being here. >> thank you, senator sanders. i'll now introduce the witnesses. our first witness this morning is david norquist, the department of defense controller and chief financial officer. under secretary norquist has been an office -- since may of 2017 and leads the department's
efforts on budget and audit matters. mr. norquist has spent his career in budget-related national security positions, including leaving the budget and audit process at dhs in the george w. bush administration. our second business this morning is mr. john gibson, the department of defense chief management officer, who was reconfirmed as chief management officer only weeks ago, after serving as deputy chief management officer since last november. prior to his service at the department of defense, mr. gibson led several aerospace companies and previously served in a management reform position at the pentagon during the george w. bush administration. for information of our colleagues, each of the witness will take up to five minutes to consolidate his opening remarks. all of which will be a part of the record. followed by questions. we look forward to receiving
your testimony. mr. norquist, you can begin first. >> thank you, mr. chairman. thank you for the opportunity to provide an overview of the department's financial statement audit progress and plans. before i begin, i'd like to take a moment to thank you and the rest of the congress for the bipartisan budget agreement of 2018. the agreement raised the caps for fiscal year 2018 and '19 on spipding that will support the national defense strategy and allow us to restore and rebuild our military. the agreement is a two-year deal so we'll need congress' support again or sequestration will return in fiscal year 2020. when secretary mattis released the national defense strategy, he described three distinct lines of effort. building a more lethal, resilient,age i'll and read join force, strengthening alliances as we attract new partners and reforming the defense business practices for greater performance and accountability.
the third line of effort relates directly to the audit. it is an important component in the poverty of our busine-- impf our business operations. to find the problems and fix the root causes. i appreciate your interest in the audit of the department of defense. it is a long-term, meaningful and necessary undertaking that encompasses the whole of the department and its success depends on sustained congressional support. the personal interest of chairman enzi and others on this committee have shown in this issue are part of the reason d.o.d. has at long last begun the audit. although audits are not new to the department of defense, this is the first time the department has undergone a full financial statement audit. a financial statement audit is comprehensive. it occurs annually and it covers more than financial management. financial statement audits include verifying count, location and condition of our military equipment, real
property and inventory. it involves testing security vulnerabilities in our business systems. it tests system compliance with accounting standards and validates the accuracy of our personnel records and actions, such as promotions and separations. the department anticipates having approximately 1,200 financial statement auditors assessing whether our books and records present a true and accurate picture of our financial conditions and results of our operations in accordance with accounting standards. based on my experience at the department of homeland security, it will take time to implement the changes necessary to pass the audit. it took homeland security a relatively new and much smaller enterprise about ten years to get its first clean opinion. however, we won't have to wait for a clean opinion to derive benefits from the audit. the financial statement audit helps drive enterprise-wise improvements to standardize our business processes and improve the quality of our data.
d.o.d. sew owes accountability to the american people. transparency, accountability and business process reform are some of the benefits of the financial statement audit. regarding transparency, the audit improves the quality of our financial statements and underlying data available to the public, including a reliable picture of our assets, liabilities and spending. the audit will highlight areas we need to improve our accountability by fixing property records, we can demonstrate full accountability of our assets. the combination of better data resulting from audit remediation and the use of modern data analytics directly support's d.o.d.'s plan to bring business reform to its operations. audit is an innovator that will drive more reform. and complies more than 24 standalone audits in an overarching consolidated audit. during an audit, auditors will select line items on financial statements based on materiality
and risk and will ask for listing of items or transactions that make up the total amount on the financial statement. to put the scope of this task in perspective, the army has over 15 billion transactions that the auditors will select from. the auditors will then pick samples from the listing for testing, which can include physically verifying that the property exists and is accurately recorded. only once the auditors have completed the testing, they well evaluate the results and report any problems they find and re-evaluate the status of the corrective actions each year. looking -- going forward, we will measure and report progress towards achieving a positive opinion on the audit, using the number of audit findings resolved. in closing, i want to thank this committee for its interest in and focus on the department of defense's audit. i can dispute the audit process will overcome many problems, some of which will be frustratingly difficult to fix.
but the alternative is operate in ignorance of these problems and miss the opportunity to reform. we are committed to the audit and implementing the necessary reforms to be good stewards of the taxpayers' dollars and i appreciate your support. thank you, mr. chairman. >> thank you for that and overseeing it. mr. gibson? >> thank you, chairman enzi and other members of this committee for the opportunity to testify today regarding the aggressive work we are doing to bring greater efficiencies to the business operations of the department of defense. any organization which receives capital for its business has a fundamental responsibility to execute in the most effectual manner. given the american taxpayer has provided the capital to fulfill our mission, we have the highest level of fiduciary responsibility to continuously conduct our operations in the most effective and efficient manner. the two-year budget deal this committee worked hard is great support to a predictable funding stream and very helpful to all of our work in the reform area.
thank you to your committee's hard work to establish this deal. secretary mattis has outlined three main lines of effort for the department of defense. build a more lethal force. strengthen traditional allies while building new partnerships and reform the department's business practices for performance and affordability. it is the responsibility of the chief management officer of the department of defense to execute the third line of effort, reforming business operations for solvency and security, gaining full benefit from every dollar spent. looking forward, the department is not anticipating funding above the outyear levels of the fiscal 2019 budget. in order to fund incremental resources, the military needs to achieve its mission requirements. we must lower our cost of operations to yield these resources. the global challenges to our military remain significant and to best equip our men and women in uniform to meet their mission, we must consider
significant reforms in the department. foundational to our vision of success in this area is the establishment of culture of performance and productivity on an enduring institutionalized basis. the work we're all doing today becomes a benefit for the next generations of leadership and war fighters to come. we are generating additional resources through efficiency by focussing on three main areas. shared or common services. enterprise-wide data and cost information and the efficient and effective alignment of the enterprise. we have begun the effort and shared services biforming integrated teams to identify, vet and implement immediate efficiency opportunities in their respective areas. knowing the challenges to any significant reforms, we are constantly fostering a sense of urgency, maintaining leadership alignment at all levels, communicating a consistent message, proactively removing
obstacles, driving immediate wins and working to anchor all of this in long-term behavior and culture. as we implement the reform efforts, we are comfortable incorporating the fly test fly operational tempo to allow us to pilot, learn and scale in each of these areas. fundamental to institutional easing this effort is governance and management. we have formed the reform management group to guide these multiple efforts. this integrated cross-functional group leads dedicated teams and fosters ongoing working relationships, aligning all the stakeholders involved in the reform efforts. as our processes mature, we will form an integrated management board. this board will utilize relevant standard measures and goals coupled willing the authorities to manage and enforce and institutionalize a culture of performance and productivity, all with the goal of continuous improvement in our business operations. the reward process is essential to success and the primary
incentive to change behavior. typically in the department, efficiency efforts are stimulated by a need to backfill budget cuts. our current approach is to drive and incentivize performance and operating financial efficiencies by measuring, tracking and reporting performance and outcomes. we will then return the savings generated to the military departments to reinvest in higher priorities and hold those people and organizations accountable. we will need your input and assistance in refining, implementing and executing as we further define the mechanics of the reward process. quality data is essential to good decision-making and we are working to improve the infrastructure to host and make available, timely and accurate data across the enterprise. we are constructing a consistent framework that involves cost
data and efficiency -- in both efforts, we are working closely with the undersecretary of defense to achieve success. the financial audit the department is undertaking is a tremendous tool and serves as an invaluable piece to our reform efforts. the audit process will improve the quality of our organizational and financial data, which is essential to good business decision-making. the audit will also reveal business systems and processes which need to be reformed. and can be incorporated into our ongoing reform efforts. by improving these business processes, we drive improved operational measures such as timeliness, productivity and simplification. many of these processes will have direct positive impacts on lethality. the third line of effort is alignment of the department. many of the defense agencies and field activities have been in place for decades and we have the opportunity to look at the end-to-end processes in major areas of operation and align all of the participants in the most
efficient manner. we intend to include and leverage leadership from the military departments, the major missionaries such as acquisition, information technology, personnel readiness, financial management, research and policy all as part of this process. a bases for evaluation for all of our projects is establishing benchmark private sector measures, setting goals, tracking and reporting. in addressing any of our reform projects, we are also looking outside the department for further economies by incorporating the whole of government. as our efforts progress, we will be looking to congress as a source of support. just as with any board of directors, we believe congress is our partner, understanding the shared risk in this incredibly robust and aggressive work. we intend to keep an ongoing dialogue with you on our plans and progresses and we'll be seeking your input, feedback and assistance as some of our
objectives will require mutual actions to achieve our goals. i consider congress to be my board of directors, therefore i welcome the opportunity to continue our dialogue on the substantial efficiency efforts we are making in the department. thank you. >> thank you. as an accountant, i can't ten you how exciting it is for me to have the numbers management team before us. your testimony is music to my ears. i want to thank you, particularly mr. norquist, for your prompt letter. had i gotten it a week from now, i would have considered it prompt. [ laughter ] that's actually when i was expecting it. i'll be sharing that with the -- with the members of the committee because there is a lot of good information in the answers that you gave me. we'll now turn to questions. i don't think i probably need to explain how the sound of the gavel and alternating back and forth works, but every member will have five minutes for
questions. i'll begin with myself and then we'll begin the alternation process. so i'll begin with my first question then for mr. norquist. the metrics used to measure the department's readiness for an audit were often very difficult to understand. even for outside experts. now that the consolidated audit has begun, how will the department help congress to understand how much progress is being made? will the pentagon provide regular interim updates on both the findings and your remediation efforts? >> yes, sir. mr. chairman, the way we will measure progress going forward is by looking at the number of nfrs closed. so when the auditor has a finding, they will write it up, we will track the number findings, we'll track who they assigned to fixing them. rather than say the department of defense didn't pass or the army, we'll be able to say this
material command had been assigned to it, 20 findings of which they have closed five. this organization had seven of which they closed seven. so you'll be able to see at a much deeper level, and part of the interest in that audit is the level of accountability so you can talk about specific challenges. the issue with the systems, is the issue with fund balance to the treasury? from our perspective, we'll do a couple of things. one is, the auditors will publish their statements that starts about november 15th. they are available to the public. they'll look like the same type of financial statement reports that go out from companies. twice and year, both in january and june, provide updates to the committee. summarizing those in easy to understand formats as well as providing tracking on the nfrs. the advantage, i think, of this one is we will not be self-reporting our progress. i will be telling you what the auditors have said. if they didn't say we closed it, then we didn't close it. the issue will be, i think that
independence allows you a greater level of confidence in data that you receive on the status of the audit and allows us to track it. this is how we did it at homeland security and it was a very effective way of measuring progress. >> thank you. mr. gibson, i want to ask you about metrics and baselines a little bit. last year, the gao reported that billions of claimed savings from department of defense headquarters reductions were unsupportable. similarly, the department of defense budget request this year claimed further billions in savings from the ongoing and new reforms but doesn't provide much specificity. can the department provide a more detailed breakdown of these savings and what baselines are being used to construct them? >> senator, the way we intend to execute this is we begin at the very working level. we have teams that are subject matter experts in nine particular areas. out of that, they will then pick
specific projects to go out that we find are efficiency projects. within each of those, there will be an intended outcome, operational and financial goals that will be based on real data. they will have a project schedule. we will be able to track and measure how they're doing on that. we can then compile all of those into groups and report those out. so we intend this to be very, very specifically driven by data that we're tracking and reporting on. and then all of that will build out to a total of what we can account for, reform savings that we'll be getting. also, i think it's important to measure that -- to mention that in addition to financial savings, it's very, very important that we discuss that we are going after operational improvements as well. those will include, it could be
timeliness, productivity, simplification. those don't always have a financial outcome, but certainly our beneficial outcome to the overall business operations. we will be measuring and tracking and reporting on those as well. >> thank you. quick question, mr. norquist, because i've read a number of stories lately about how the pentagon can't responsibly spend the extra fiscal year 2018 funding from the recent budget deal before the end of the current fiscal year. marine corps general walters said we have a year's worth of money and in '18 and five months to spend it. i understand there are proposals to give more flexibility in spending this money, including changing fiscal 2018 operations and maintenance funding from one year to a two-year funding. beyond this current issue, are there other changes in the budget process such as bienial
that could result in greater efficiency in military spending? >> i think there are two types of challenges that we look at as you look over time. let me do first the '18 and then the longer period and we can come back to this. in '18, there are a series of rules designed to encourage to spend their money earlier in the year and not hold it until the end. one is it called the 80/20 rule. you can only spend 20% of your money in the last part of the year. when you get the increase late in the year, that makes it harder. some believe that 80/20 rule is essential because then your deadline isn't 1, october, it's two months earlier. all of these, though, relate to wanting to spend the money where the highest priority is. as you get closer to the end of the year, you don't have time to go out for the contract and the competition with the amount of time that is left. if you put something into a shipyard for maintenance and the
cost of actually maintaining -- fixing it is less than you thought so they give you the money back. you may be too late to put it against your next highest party so you put it against the next one that is available. we like to discourage that sort of use it or lose it view and put it on the highest priority and where necessary look at what type of flexibilities are required, either being able to move money between accounts with prior notification instead of prior approval. some of those flexibilities help. this is true whether you're in a year where there has been a significant increase or not. you just want to make sure people are able to put it against the highest priority. >> thank you. i'm sure we'll talk a lot more about that. my time's expired. senator whitehouse? >> thank you very much. mr. gibson, gao has reported nearly a third of the roughly $1.5 trillion cost of current defense acquisition programs is a product of cost growth over initial estimates, which suggests that the department has
trouble either estimating costs or holding contractors to original estimates. now we are looking at a proposal to spend something on the order of $1.7 trillion on nuclear modernization, including the development of new weapons platforms and warheads. there have been warnings issued that if we were to do that, those modernization plans would wipe up other defense programs. so i guess there are two problems that i'd ask you to comment on. one, what's the plan for funding that without cannibalizing other programs? we seem to be experts on that. and two, are there additional controls that we should put in place over this nuclear program to make sure that the $1.7
trillion doesn't have the same fate befall it that befell the other defense acquisition programs of these massive cost overruns. >> senator, in the area of contracting, the particulars we're focussing on is the common purchase of goods and services and doing that in a more efficient and effective manner. that is an area that i am specifically focussing on. and what this does is this takes a look at contracts from a -- what's called a clean sheeting, a very common private sector practice, to set the requirements and set the terms and conditions and then look across the market to best derive value. we're also looking at setting requirements in, again, common service contracts so that it's the same across -- >> i'm sorry, but i think what i was trying to get at in my question is, does a massive
oncoming expenditure like $1.7 trillion for this nuclear modernization program give us an occasion to take a look at new and different checks and controls specific to that program to see if we can learn something from it and not have it fall to the same fate as the existing defense acquisitions of massive cost overruns? >> yes, sir. i believe the opportunity to look across all phases of acquisition. so the area we're focused on, absolutely. we need to do it. it's good fundamentals and good businesses. >> you wouldn't object if we looked forward to this nuclear modernization program and looked to additional ways to make sure the estimation and accounting was done better than has been -- >> senator, i think that's found eightal to doing things right. think that's how we need to do it. >> let me ask one more question then, d.o.d. contract management has been on gao's high-risk report list for almost 25 years. and there are obvious concerns
about the relationship between the defense department, the defense contractors, defense contractors' role in congress. there is kind of a loop that can exist there. and in addition, there is the revolving door problem between the department of defense and these contractors, with a view that some of the contracts may not be managed as scrupulously as ideal. are there things that we should be doing to improve the revolving door issue between the department of defense and these contractors to make sure that that relationship with these contractors remains healthy for the taxpayer? >> senator, just my specific area of expertise is not contracting and acquisitions, however, i will say it's my understanding that between the policies and the far and within contracting as well as our
ethics, those are in place. i think it's always our responsibility to follow those to ensure that we truly get to the best place from a contracting standpoint and a conflicts of interest standpoint. >> you agree that it's vital that the contractor should be serving the defense department and not vice versa? >> i think leveraging the private sector is absolutely invaluable to us. and that we are the customer and they are the supplier. >> my time is up. >> thank you. senator corker? >> yes, sir, mr. chairman. thanks for having the hearing. and to the two of you, thank you for coming. i don't think any of us respect more -- could respect more our men and women in uniform, and i know you work on their behalf, and we could not respect them more. i just -- we all watch us kill
people remotely in mosul and other places with people from far away commanding drones and we're just -- it's remarkable that we're able to do things like that. d.o.d. has the capacity to turn entire countries into craters. it has all kinds of cyber capabilities. just, again, you're here, you're the messengers, we're not speaking necessarily to you at all. how in the world is it that 2018, with all the massive capabilities that the pentagon has, this is the first time the pentagon is able to conduct an audit? what is going on with the culture at the pentagon? mr. norquist. >> i share your concern. you know, when this administration came in, we made starting the audit right away critical, and so in the very first year we've begun it.
>> just what's going on with the culture? how in the world could it be that the biggest, greatest fighting entity in the world cannot audit itself until 2018? what's wrong? >> so the -- i'm speaking a little bit nose oh who came before me but there is a sense in the mission focus is not as focused as the back office as you would see in a private company. i think there is an essential value to the taxpayer it making sure the rest of these operations go well and part of the messaging that the secretary has made internally is to make sure folks understand this is much broader than just financial management. if you want to make sure your inventory of spare parts is correct, your new informations is correct, this is part of what the audit covers. and part of that culture comes from two things. leadership at the top. mattis and shanahan have made this a top priority and i think that's helped to turn the ship. and the other, quite frankly,
the emphasis from congress. i've found it very helpful in meeting with folks. >> that's good. i don't care about congress. the fact is we probably wasted hundreds of billions of dollars at the pentagon through the years. through poor management, is that correct? that would be a lowest mate, would it not? >> i wouldn't be able to speak to that number, senator. >> we're getting ready -- we just, you know, mr. gibson, thank you for giving credit to this committee for passing the caps. we actually had nothing to do with it. we had four people in a room that bid each other up. this cap deal is going to raise spending over the next ten years by a minimum of $2 trillion. $2 trillion. $2 trillion. what we're likely seeing this omnibus is coming before us in a few weeks is some of the most god awful taxpayer abuses that we've ever seen because things are being plussed up so quickly, and on the domestic side,
nondefense, so much money is being pumped in that there is going to be some of the most, again, god awful taxpayer abuses we've ever seen. some of that could take place at the pentagon. i mean, we're raising the cap by $80 billion. you know, what the president requested wasn't good enough. we had to go $30, $35 billion above that. we're doing the same thing on the domestic side, not quite to that level, but how is it possible with six months remaining in the year for you to possibly spend the additional cap, the additional amount of money, the $80 billion you're getting, plus i think $71 billion in oco spending. how is it possible to spend that money wisely, mr. norquist? >> i'd be happy to answer that, senator. so when you look at the increase, you'll find the vast majority of that occurs in procurement and r & d which are two or three-year money. when you talk about buying
additional munitions, planes, ships, you have time to negotiate the prices with the contractors and make the awards. the challenge is going to be an operation of maintenance account and the difference between had we stayed under sequestration and had we -- and under the number that the congress is looking at is in the order of about $13 billion. now, some of that increase the president had requested. we had plans for in the budget. so the amount of adjustment you're making is more modest than the larger number you're seeing because only the o & m piece has to be executed by year-end. >> again, we thank you and others for what you're doing. i'm happy in 2018 we're finally going to have an audit. that's good for taxpayers. i cherish the men and women in uniform like senator cakaine an other's who serves. we know there have been massive amounts of wasted money because you can't even audit and i'm
glad that you're on a path to do something good about it. i do fear -- i hope we're going to have a chance, mr. chairman, to see this omnibus a few days in advance because i've got a feeling taxpayers are going to be shocked at what is in it with the massive increases taking place in one year. but thank you so much. >> thank you. senator sanders? >> thanks very much. i agree with senator corker, this is an enormously important issue. and the d.o.d. must be run cost effectively and efficiently. let me ask you to start off with a simple question.
about half of the d.o.d. budget goes to definite contractors, is that roughly right? >> that sounds about right, yes. >> okay. i think at the top of the list there is lockheed martin. >> that would be one of the top five, absolutely. >> okay. answer me this one, as i understand it, i'm looking at the revenue of 2016 defense revenues that went to lockheed martin is roughly $43 billion. and i'm just kind of curious, the ceo of that -- of that corporation received, what was it, $20 million? over $20 million in compensation. and as i understand it, over 90% of their business was the department of defense. in other words, we are giving this guy roughly an $18 million salary from the taxpayers of this country. does that sound right to you? is that something that we might want to look at and say when we
give, i don't know what the salary is of the secretary of defense, what is it, $150,000, $200,000? does it make sense to you that we pay the secretary of defense $200,000 or less and we give a contractor who gets 92% of his revenue from the taxpayers of this country $18 million in taxpayer money? is that something that you might want to look at? >> sir, i can't speak to how the companies compensate their executives. i know there may be rules on those, but they're outside my expertise. the one i can speak to, though, we do have inside the office of the cfo, we have an organization that audits the contractors. when they send us invoices and payments, go, go through those to make sure we're not being charged. >> i got that. but if i'm right over 90% of the revenue for a company comes from the taxpayers of this country, and this guy is making $20 million a year when the secretary of defense makes less than $200,000, i think that might be an issue that you might want to raise.
all right? this is -- it essentially, for all intents and purposes, lockheed martin is a government agency, if you like, private, but a government agency republican virtually fully-funded by the united states government. is it reasonable to say they keep their ceo's salaries in check or should the taxpayers be paying exorbitant salaries? >> the taxpayers should be paying for the services we receive, senator. >> do you think it's an issue worth looking at? >> i don't know the acquisition rules whether executive salaries falls within that scope. >> i think they might. let me ask kind of a dumb question, if i might. the truth is, everybody supports the department of defense. we all support the men and women in the armed forces, but as i mentioned earlier, we are now spending more than the next 12 countries combined in defense. against my vote, congress just voted another $165 billion to go to the military.
so here's the question, who is our enemy? who are we spending -- where -- we knew that there are threats out there. we're all aware of terrorism. but i think the amount of money we're spending fighting isis, for example, is relatively small. who are we preparing to go to war against or defend ourselves from? >> senator, the secretary of defense outlined in the national defense strategy the challenges that we face. part of the emphasis in the strategy was the shift from a focus on terrorism to great power of competition with a particular emphasis on the long-term challenges of china and russia. it refers to both of those as opportunities for peaceful competition, deterrence and then the ability to prevail in a conflict should we have to. the strategy in both the classified and unclassified option, but it lays out and goes through the challenges we face. >> so we're spending hundreds of
billions of dollars defending ourselves from china while major corporation after major corporation is shutting down in the united states of america and moving to china? anything in congress about that? >> so i think the white house and the president anything incongrewous about the. >> i think the white house -- my expertise is more on the defense side. >> thank you, senator sanders. senator kennedy. >> thank you, mr. chairman. has the audit begun? >> yes, senator. >> okay. i want to thank both of you, and i want to thank president trump for doing what the law directs you to do. under the 1990 statute, what position, not what person, but what position at the department of defense was responsible for initiating the audit? >> the audit -- i'm not sure how
the language is phrased. >> who is responsible at dotd -- i mean dod under the 1990 statue for saying i've read the law, we're going to start this audit. what position? >> my belief would be since it's called the cfo act, the cfo or the secretary, depending how the language is written. >> okay. would you get me the name of every cfo who has served at the department of defense since this statue was passed? >> i can do that, senator. >> okay. i don't know where to begin. you know, senator corker is kind of the conscience of the senate on our deficits.
and i first heard him speak about the fact that the department of defense had never been audited at a meeting. and frankly, i thought he misspoke. i couldn't believe it. i can't explain this to my people back home. every single one of whom support a strong defense. but when i tell them that every other agency in the federal government undergoes an another, but the department of defense, and it was required to do it 18 years ago and it still hasn't done it, they think i belong in a straight jacket. i just find this -- how did it go on 18 years? didn't somebody ever call the cfo and say, have you started the audit yet?
>> so i will try and attempt to answer the question, though i come from your perspective. i viewed the another as essential, something we needed to start. in my prior experience at dhs, that's exactly what we did. we had an another from the moment dhs was created. the types of answers you'll hear, it's large, it's complex, it will take longer than the tenure of the person there. in my mind, those are arguments to start, not arguments to wait. there are some mechanical things you had to put in place to make it worth starting the audit. things if you're not able to answer the sample requirements to the auditor, they can't begin. and the department having not been set up that way needed some time to do that. i say this not to explain it, but because i recognize, and my perspective is, we ought to have started. i'm glad at least in the transition, the contracts were set in place that allowed us to begin now. rather than waiting to put out
the contracts. >> let me put it another way. i have read that the department of defense has more federal contracts than all the other agencies in the united states federal government put together. is that right? >> i don't know. i don't know if that includes grants or not. but yeah, it might be. >> do we have -- if i ask you for a list of all the contracts and the amount, could you give it to me? >> so that is something that we're building called the universe of transactions. >> you couldn't give it to me. >> not easily, it's a very long list. >> we don't even know how many contractors we have? >> let me back up. there is a requirement that the congress has put on the department and others to public at usaspending.gov that information. >> let me interrupt you. i've only got a few more minutes. i see where you expect to spend
$367 million this year to conduct the audit and an additional $551 million to fix the problems. how do you know it's going to cost $551 million to fix the problems. >> i don't know how much it will cost to fix the problems. i know how much the services have set aside to start to take the problem on. we've been able to break it out according to how much the army, the navy and the others are going to be spending on fixing the problems. how long it takes them remains to be seen. >> well, we've got, clearly, some people who have -- some hogs who have all four feet and their snout in the trough. and we've got to find out who they are, gentlemen. and if we need to pass legislation to require this to be done and say -- make it criminal if it's not done, somebody goes to jail or at least somebody's fired, i would appreciate your advice on that. i can't explain this to my
people. i can't. i'm sorry i went over, mr. chairman. >> okay. senator kaine. >> thank you, mr. chair. thanks to the witnesses. i associate myself with most of the comments that have been made. senator corker's innocence of what's wrong with the culture? i had the same feeling. i'm an armed services committee member. i joined the committee in january of 2013. senator king joined with me. i think of the other budget committee members i also think senator graham was on the committee at the time. and i'm a numbers geek. i was a mayor and governor and was used to audits and financial statements. we were stunned to get on the committee and find that the 1990 statue, notwithstanding that the pentagon had not made greater progress, they were trying to become audit ready at the time, but there wasn't really a meaningful calendar in terms of auditability. we passed as part of the defense authorizing act that year, the 2014 nda we worked on in
committee the timetable that you are now on to require the audit to be done under this timetable. we shouldn't have had to do it. it should have been done long before. but it is good to see you making the progress you're making. i think the written testimony is very helpful. you, mr. norquist, talked about the scope of this audit. and it is a beginning audit. it's going to find a lot of things wrong. it's not as broad as subs subsequent audits may be. but they're all under way right now. i would encourage you to not do this in your verbal testimony, it would have been hard, but i would encourage the colleagues to look at the chart on page 6 of mr. norquist's testimony which sets out the timeline of what is to be expected here over the next few months. there's one item on the timeline i didn't understand. i'm sure it has a simple explanation, but it is forthcoming. march 2018 on page 6, submit ndaa ranking report to congress.
obviously, in armed is was we're working on the ndaa right now, i'm assuming it's a report that's coming out of the audit work that could be helpful to us as we're working on fy-19 nda. is that what this report is? >> what the committee asked us to do was to rank the components by the progress they have made. of those 24 agencies, eight of them already have a clean opinion. they went under audit early on and did it. >> i thought it was nine. eight that have -- >> there may be nine total. >> yeah, yeah. >> then some have modified opinions, then a range of them that have been audited for a p couple years. but the largest, navy and armed forces, haven't started. we're ranking progress and we will do that every year so you can start to see, the idea that the chairman mentioned, an easy to see format who's making the progress on closing open findings. >> i think that is very, very important. this will be, really, the first
ndaa where we'll be able to take in this audit work that's being done functionally and really use them as part of the ndaa that we write. that will be enormously helpful. the one point of disagreement i had with senator corker, he said i don't recollect about congress, not the pentagon. the congress hasn't insisted on it. we haven't insisted on it with the pentagon. the pentagon every year will submit a budget request, and congress will give them more than they ask for. it's the same phenomenon here, we've insisted upon it with others, but not until the ndaa put it on a calendar in 2014, which was 24 years after the 1990 act, have we started to insist on it. i think that's obviously important that we continue to insist. i think you're hearing a bipartisan agreement around the table that we should. just quickly, to conclude, but again, i think that timeline is very helpful. your conclusion is important. i anticipate the audit process will uncover many places where
our controls and processes are broken. that's true. there will be unpleasant surprises. the dla audit already showed some. some of these problems may prove frustratingly difficult to fix. i think we have to be prepared for all of that. we're going to get a lot of bad news out of these audits. if we do them right. if we don't do them right, it may be nice news. but that's important for us to get the bad news so that we can then, you know, your answer to senator kennedy's question, how do you know the fixes will cost 530 million? you don't. you have no idea what the fixes will cost. that's just what's set aside. there's enormous upside opportunity in here for us if you spend money on the wrong things then you may be underfunding the right things. or using tax dollars you shouldn't be using, that should go to some other purpose or to the taxpayer. this is an important thing. i do want to close on this. you mentioned, it's not just about costs, it's about operations. and if i might, mr. chair, just
for 30 seconds, audit is not the same thing as effectiveness. we had a hearing yesterday about air power on the navy side and the -- in the c power subcommittee of armed services. we talked about lessons learned on the f-35. we asked an admiral, has it been worth it? he said fantastic capacity, but he just groaned, he said, we should have had it ten years ago. we said, what are the lessons learned? cost overrun and delay. he said part of it was putting in technological requirements, software side is difficult. the other thought is we tried to do something creative, build a flat form that can be used by the air force, marines, navy, and let's cost spread by trying to build one we can sell to nato allies too. but what that ended up doing is created decision-making process that was a complete morass,
satisfying four service branches and allies as you're in design. it turned it into a decision-making nightmare. and so did we get some economies to scale? maybe. did we get interop rablt? yes, but the delay and cost overrun as a result, the audit won't necessarily answer all our effectiveness questions so we need to have a realistic expectation about what it will show and what it won't show. it's necessary. >> senator perdue. >> thank you, mr. chairman, and thank you both for being here. i echo and support most of what's been discussed today. i'm chagrinned that it's taken us this long to get to this point. i have a quick question, mr. norquist, how long will it take us to get a clean opinion and identify material weaknesses, deficiencies, significant deficiencies, et cetera, when will we get a clean opinion? >> senator, i don't know. >> what's the range of expectation? >> so the benchmark i use is the last assignment i had at
department of homeland security, it took them ten years, the numbers of weaknesses came down steadily so you could see the progress. there were typically one or two at the end that took some time. >> it's your expectation this year we will have an estimate of the number of material weaknesses, deficiencies, et cetera, the remediation could take ten years, how long will it take us to determine what work we need to do to remediate. >> you'll know the bulk of that this fall. the second year we may go deeper and uncover more things. >> so i'm just a dumb business guy. but the d.o.d. is not that much bigger than the largest public corporations. i can't imagine walmart calling the sec or is irs and saying i'm sorry, the quarterly statements aren't going to be in. ten years is outrageous. we've got to find a way to close that down. no public corporation in the world that would allow this
federal government to remediate for ten years. it's not necessary. i want us to address that in future conversation, mr. chairman. second thing, i want to talk about congress. easy to explain, congress didn't do its job. passed a law and didn't do anything to enforce it. all the excuses used from systems to inadequacies, just unacceptable and should never have been accepted. that's water under the bridge. i want to talk about going forward. what have we learned, senator whitehouse, $1.7 trillion being spent, the reality in the last decade, a less than a third of what we've spent as a federal government has been borrowed money. if we continue to add debt the way we've added the last ten years and the way the current budget says we will in the next decade, by that definition, the the first dollar goes to mandatory expenses, every dollar
we spend in discretionary spending, d.o.d., v.a., and about $350 billion of total other discretionary domestic spending is borrowed money. we have these situations around the world, these bilateral agreements like taiwan, to defend taiwan against china, we have to go to china and borrow the money and go to taiwan and do that. this is how serious this is. when we talk about procurement, a lot of these contracting relationships are dealing with procurement, i believe the procurement process and the cr impact, the cr realtor of a broken budget process adds to that. when you do these audits, are you going to measure the impact of continuing resolutions on the procurement process in the billion dollars of waste that are found there, or to be found there? >> the audit itself does not directly do that. what it allows us to do, because of the type of information we get out of the audit, is to drill down into exactly those types of questions. because you'll have the transaction level data that will
let you look at the effect. >> right, i get that. as i understand it, there's no common chart of accounts. that will take a while to d develop that as well. and the systems and inadequacies, a hand in hand ranc -- hindrance, i get that. if you run into problems or obstacles, we need to know on the front end. ten years is too long. i want to talk about the sequester and the fundamental measurement of the effect of not having a capital budget. we don't have a capital budget, mr. gibson. i know you answered the question earlier about normal operation procurement, i get that, ongoing replenishment of ammunition and supplies, et cetera. in this big ticket, $26 billion a year for ten years to basically recap just the navy. that's the current estimate, and my concern is, is that $26 billion then goes to 4x or 5x
like the past decade did, we're talking about numbers that are unattainable. my concern is, are we in this audit looking at the procurement process and finding the inadequacies in there to recognize the changes congress with the defense -- cash flow basis which nobody else in the world does, and that adds billions and billions and billions of dollars to our procurement process. over and above design creep, those are all real, no question about it, we talked about that. one thing i think as a business guy, we don't deal with this on capital format, and we create this tremendous opportunity to waste money on the procurement process. respond to that. >> the way the information is currently stored, you don't have what you need for a capital budget, when you look at audit
standards requirement, that gives you the basis. one of the questions for congress becomes when you have that type of information do you want to change the way that you manage the funds? but you wouldn't have that to do today. over the audit you'll build up exactly that type of information. >> thank you. senator van hollen. >> thank you, mr. chairman, and welcome both witnesses, and i want to associate myself with a lot of the comments that have been made by my colleagues. my question relates to the overseas contingency operations account, oco. as you know we have funding in the base defense budget for ongoing operations, which we expect to go on for the indefinite future. and then we have the overseas contingency operations account, oco. there's been great concern on a bipartisan basis that oco has been used as a slush fund because it's not been subject to the spending caps. when i was in the house of
representatives, i teamed up with with mick mulvaney, a conservative member of the house, now the director of omb, we put language in the 2016 defense authorization bill asking the defense department to adopt omb standards at that time for what constitutes oco funding and what's overseas funding. since then in january 2017, gao issued a report recommending that the department of defense work with omb to develop criteria. since then, in 2018, in fact, in the defense authorization bill we passed, the congress instructed the defense department to develop these criteria by september of this year. are you on target were providing those criteria to congress? >> we have -- consistent with your previous discussions with director mull vaney you won't b
surprised to know in the outyears we hants wants us to s only the incremental costs show up. dramatically reduces the size of oco. we have worked with omb. >> once you develop these criteria, would you have any objection to the congress codifying those criteria so we can avoid any monkey business in slush funds in the future. >> i'd have to defer to omb on the effect of turning that into legislation. >> let me talk about the whole overseas funding effort. we all wake up to tweets these days from the president of the united states, and a few weeks ago he tweeted this. "this will be a big week for infrastructure. after so stupidly spending $7 trillion in the middle east, it is now time to start investing in our country." that was the president's tweet. are you aware of how much the trump budget calls for in
overseas contingency account spending for the next ten years, both on the defense side and the smaller portion on the state department? >> i am familiar with the defense numbers. they're on 69 or $71 billion in the '18, and then a similar number in '19. they shift to move the sustainable costs, the things that are really not incremental into the base. i think it sits about 20 billion a year for the next five years after that. >> those are place holders, of course, because you don't know where the conflict is headed. >> right. a certain amount of that spending, as i read the budget, based on strategy over the next coming years. >> correct. >> i hope someone will point out to the president of the united states that when i add it up it comes to $447 billion over those ten years, which is more than twice as much as he asked for in his infrastructure plan. he asked for $200 billion a year for our country, as he put it,
infrastructure, he's asking twice as much for what he referred to in the tweet as stupid overseas operations. i hope someone will bring that to the attention of the president next time he decides to tweet. let me ask you about the outyears. you have, as you indicated, the oco funded at $66 billion through fiscal year '22, i believe, fiscal year '22-'23. after that, as i see it, it goes to $20 billion a year. excuse me. $10 billion per year after that as you say it's a place holder. is there any basis for choosing 10 billion? senator corker said, these numbers quickly add up over time to much more than anticipated. you're dropping it from $66 billion in fiscal year '22, to 10 billion in fiscal year '23. over a ten-year budget window that's a savings of $560
billion, right, if we drop back. my question is, what is the criteria you used to come up with the $10 billion as you look forward and mention the strategic plan with respect to china, russia and the other threats that may be out there. >> so our budget looks out through 2023. and is based off more or less a static of projection. so just as the combat commanders requirements kmang on what is required for those. i believe beyond the five-year window is omb estimate based on where they think the direction is heading. on the original submission we built for the budget the expectation was around 69 going out. that's the next five years for omb wants to shift and only leave 20 in oco. less in the contingency fund. >> good idea to put more in base it's really base money.
the net effect of that, obviously, reduced the overseas contingency. i just wondered if there was any strategic basis for that big drop. we'll follow up with you. thank you, mr. chairman. >> senator cotton. >> thank you, mr. chairman, thank you gentlemen for your appearance here today. a lot of questions and answers today have focused on the past and what's happened in the past and why we are where we are today in 2018 without an audit. both of you are relatively new to your positions. and we appreciate your commitment to completing that audit. so let's look forward. and can you tell us, mr. norquist, just the simplest, briefest terms, what do you hope to accomplish with the completion of this audit? >> i hope to accomplish three things. the first is to be able to put more relevant and timely information in front of senior decision-makers so that when they're trying to make decisions about the organization they have relevant data. the second is, is to provide
insights to the reform efforts where we discover broken processes or things where we can save money by changing the way we operate. and the third is to be able to make greater use of data analytics because we'll be able to rely on the underlying data. those, of course, the underlying transparency requirement to the american people and congress. >> mr. gibson? >> senator, i find the audit incredibly beneficial to what we're working as mr. norquist said, the data is incredibly valuable. we're looking at putting in cost analysis tools so that once you have the good, good data that whatever the user and the operator is can have good cost assessments so they can then place assets where they need to be and manage those that don't fit within the zone. the second is the systems themselves, what we find is that often contributing to some of the weaknesses, or poor systems,
this fits right into one of our significant areas of reform, which is i.t. i think we can contribute there. and, again, that contributes overall to good business processes. and last is the ability, through this process, to discover areas that the weaknesses translate into truly discovery of good information. already we've had discussions about how the spares are managed in the navy. you look at ammunition in the army. just two good examples of once we have better clarity there, we can then better manage each of those, both from a financial standpoint, but then those directly contribute to readiness. >> and, so the final point of your answer there, is that what it means to a private who's on the front lines today in afghanistan or iraq, that he's going to have maybe a little more training, maybe faster
access to parts or ammunition, what have you? >> i think the answer is definitely yes. all of this contributes really to the secretary's first priority, which is lethality. >> mr. norquist, you were nodding your head in vigorous agreement for the record? >> yes, you order a spare part, you know it's in inventory, know when you're going to get it, able to keep your maintenance up. >> what is the potential magnitude of the savings this could ultimately yield for the department? >> i think you'll see savings in three types. i'll -- for the middle section i'll defer to mr. gibson. in the financial side, when we automate things that are currently manual, you steamline the accuracy, reduce the cost. those will not be enormous numbers, but they'll be valuable and sustained numbers, efforts that will drive reform. the third one, which is an unknown, understated value of the audit is congress passed a law on information security standards. the auditors check those. they do cybersecurity testing of
each of our business systems. when they find weaknesses, that's not a dollar savings, but it's enormous cost avoidance if somebody can't break into your payroll system and others. that's an upside. let me defer to mr. gibson on reform. >> before we go to mr. gibson, the 2019 budget request suggested that internal business reforms could save a little over $6 billion. a 2015 defense business board report, which essentially said if you ran the department like a business, and that would mean eliminating virtually all of the civil service work rules, which i don't think many members of this committee or congress would support, but if you eliminated all those legal requirements, you'd save about $25 billion a year. so i'll put those numbers on the table. mr. gibson, turn to you, you can follow up on what mr. norquist said, i'd like to get a sense, could the results of this audit yield savings of that magnitude
or larger, 25 billion according to the 2015 defense business board? >> well, senator, let me attack a couple pieces of those separately. one, i think we have laid in 6 billion. and then omb's laid 46 billion across the fight-up. we're very comfortable we will meet or exceed those numbers. directly is to the audit. the audit is, as i mentioned earlier, a great tool to help us get there. but is in addition to other reform initiatives. and then lastly on the dbb, i can tell you i fully embrace what they've suggested. we actually took some of the specifics there where they said focus on what is known shared services areas, put teams in place and go after that. we've done just that. we actually added three additional areas to what they suggested. and then the last part of that,
i think that while we go after shared and common corporate type services, we always have to remember our main mission is the lethality of who we are. we also have to incorporate the fact that security of what we do, and that impacts inventories and supply chain, and logistics. and then lastly, very simply, we are in a more regulated environment than the private sector. but it should not be lost that the spirit of what that report did we fully embrace. and i think it has great value to us. >> thank you for those answers. $6 billion in the air, $46 billion over a five-year defense plan would be great. i just have to point out we just increased the defense budget by $85 billion in one year, that's the result of seven years of living under the deeply flawed budget control act. so i admire you for taking on a very, very big task. but it's really congress's
responsibility here to fix this problem. >> senator widen. >> thank you, mr. chairman, let me ask you a question, if i could, commissioner norquist. this issue of auditing the pentagon is the longest running battle since the trojan war. it has gone on and on. and it comes now in the context that senator cotton made, $85 billion or more for the pentagon. and we got a budget that's going to cut medicare and medicaid. so you have to put this in that perspective as you face these issues. and when i was reviewing your testimony, one sentence really leaped out at me. you said in your testimony that it's going to take time, your words, to move from qualified audits to clean audits. so i'd like to know, are you telling the american people with that statement that maybe it's going to take another 20 years
to move from failed audits to clean audits? how would you explain this to the american people? how long is this going to take? >> not knowing the findings, i don't know how long it's going to take. i can give you some -- >> how about an estimate? the public at least deserves some kind of estimate. >> so the only benchmark i can use is homeland security took ten years. part of the reason that makes a bit of a challenge when you think about the money the auditors are talking about, they're not talking about just the money congress appropriated in 2017. the procurement money congress awarded eight years ago was available for the first three years to obligate and five years to disburse. the auditors are welcome to pick any transaction going back over those eight years and ask us to document and support those transactions. when you look at old military equipment, the ability to provide valuation and historical
records, my concern as the cfo is there are some of these choices that i don't know that the information we will get is worth the expense i would spend. i would want to come back to you and say this piece of equipment is going out of inventory in three years. do you want me to spend a lot of time valuing it or do you just want to let it roll out of inventory, it's materiality is going to decline. >> at my town hall meeting this weekend when people are going to ask about waste, and compare various items in the budget, i think based on your answer, i have to tell oregonians that it is going to take more than ten years based on the fact that you compared it to something else to move from failed audits to clean audits. is that correct? that's a yes or no answer. >> to get all the way to the clean opinion, which requires fixing virtually everything, that may well be true. but the benefit of the audit we will start to get right away. >> i'm going to take that as a yes that it's going to take more
than ten years to get to a clean audit. i'd really like just a yes or no answer because the public, it seems to me, deserves that at this point. >> absolutely, senator. >> is that right? >> over ten years. >> yes, sir. >> let me ask you one other issue. we had had several policy analysts over the years tell us that they don't think the auditors are going to uncover new inefficientsicies of a grea magnitude. what's striking about that is that if analysts say they won't find many things inefficient, why is it going to take more than ten years, by virtue of your last years, of a clean audit? i'm trying to reconcile these two. do you agree? >> we haven't had the results of the first year audit. >> what's your opinion now based on the fact you've worked in this field for quite some time,
what's your opinion today? >> that you will find places for savings, that you will find things that you can automate to improve the accuracy of the data, that you will find chances to improve inventory that will save you -- >> a lot of inefficientsies or a small number? >> i wouldn't have a way of saying at this point, senator. >> i'm going to hold the record open because i would like your best estimate on that because that obviously goes to the question of again trying to explain to people why this is taking so long. everybody else in government gets audited. businesses get audited. this really is the longest-running battle since the trojan war. by the way, i want it understood you're walking into that. that is not your doing. but you are going to be the point person on this. and that's why i've asked, i think, a little bit more pointed questions because the public frustration on this point is enormous. thank you, mr. chairman. zblnch
>> senator boozman. >> thank you, mr. chairman, and thank you all for being here. we appreciate you all taking this on. this is a huge task. it's so, so very important. appreciate the emphasis on the business practice reform approach that you're taking. and certainly your work on the audit is going to be so, so vitally important. the key enabler to ensure discipline metrics that we need to enact reform. and i appreciated the three things that you were going to get done. on the other hand, you know, you're going to hold people accountable. and i know our chairman and ranking member very, very well, and i think i can speak for them and the committee that we're going to hold you accountable. in the sense that you have taken this on. it is a huge deal. as you've heard from the committee, there's a lot of frustration in this area, a lot not only in this committee, but
throughout congress. we are going to get this done in a timely fashion. now, the services had an audit, and i don't think they've been completed for various reasons or whatever. but the auditors got in there and made a lot of recommendations, hundreds of recommendations. what have you learned from the service audits, the air force, army, whatever, in the sense, navy, was there anything to be gleaned there that you can use? >> yes, senator, there was a couple of things. one of the overarching findings was that there is often a gap between what management believes is being done based on the policies that were issued, expecting that those policies are being followed and then you go into the field and you discover either the field is not or cannot operate according to those, that information gap the audit closes and allows you to recognize either we've got to change the policy or change the way we operate. that's a valuable tool that lets
you bring better controls in. there are some places we've seen that -- >> are we able to go ahead and follow up on that right now? i mean, are we starting already, or do we have to wait fortimeli to start? >> this is the point i wanted to follow up with the senator which is we will get those findings each year, start the corrective action plans right away. what we need to do is prioritize those. some things where the benefit to the taxpayer and the american people is quite high. get to those sooner. the other thing is accounting entry, it won't save money, and you want to be cautious how much effort and money you spend trying to achieve that goal. and so we'll want to strike that balance. >> so go ahead. i interrupted you. are there other things you learned? >> inventory records and making sure the accuracy of those, i think the army found black hawk helicopters that had been delivered but hadn't been yet
loaded in their property system. the person there may have known it, but in a search -- air force looked at 12 facilities and found 400 buildings and structures. the people in the buildings are there. but if you did a look at how much do i need to do to do maintenance on my buildings, you wouldn't have had that. those types of issues and others showed up in dla. the accuracy of that affects a better operation and enables reform. >> mr. gibson, the fiscal year '19 defense budget submission indicates an expectation of saving of $2.9 billion from ongoing reforms, including reforms in health care management. can you give us some examples? can you talk a little bit about health care management, and some of the ways? i mean, that's such a huge issue for not only the department of defense, but for the country in general. do you have any ideas about
efficiencies or savings in that regard? >> yes, senator, we're looking at this in two different ways. there's the larger, driven by the 702 requirement to look at health care. we've taken the opportunity to step back and work with the services, and with dha, to say what is the optimal way to truly organize the relationships? the services are responsible for providing a ready medical force, and that dha provides the facilities and support to get there. that's the easy part. the hard part is defining the roles and responsibilities, and how we would roll that out. but we're in the middle of that right now. the goal is to end up truly with the services having the ability to provide a ready medical force in the most efficient and effective manner and be able to support the rest of the medical system also using private sector and government resources.
another way we're attacking this, sir, is to -- we have a health care team. and that cross functional team then looks at specific projects, which are enterprise wide. it could be management of pharmacy services, reimbursement from third parties. frankly, it could be common buying of professional services. and those, we know, are relevant across the enterprise. we're looking at those and implementing those immediately to affect savings. >> thank you very much. we do appreciate you and your teams for their hard work. thank you, mr. chairman, and senator sanders for holding a very, very important hearing. >> thank you. i think senator sanders and i have some additional questions. senator sanders. >> thank you, mr. chairman. mr. chairman, i kind of think that the elephant in the room here is the relationship of the
d.o.d. to defense contractors. i think that's the area that needs most research. in that regard, i want to touch on three subjects. number one, i want to get back to this issue of ceo salaries. two out of the top four defense contractors have ceos that make at least $20 million a year despite the fact that over 90% of their revenue comes from the federal government. okay? i worked hard and successfully with others to make sure that workers who work with federal contractors get at least a minimum wage above $7.25 an hour. we brought it all the way up to a big $10.10 an hour. we said if you are working for a contractor who's been paid by the federal government, you should not get a starvation wage. i would like a report from you as to what you can do to say to ceos of defense contractors that
it does not make a lot of sense that they are making now a hundred times more than the secretary of defense. now, i am aware that 20 million is a small part of these multibillion dollar contracts. but it sends a message if a corporation gets the overwhelming percentage of its revenue from the federal government, that gives the ceo a large salary, it tells me it's doing a lot of other things to ignore the needs of taxpayers. i would like you to get back to me with some ideas as to how you can negotiate with these large defense krcontractors and tell them they should not be paying their ceo a hundred times more than the secretary of defense. that leads me to the issue of defense contractor fraud. since 1995 lockheed martin has paid over $767 million in fines or related settlements for 85 instances of fraud or
misconduct, and since the year 2000, lockheed martin has taken in 550 billion of federal contracts. some of the fraud and misconduct includes unfair business practices, contractor kickbacks, defective pricing, emissions in groundwater clean-up violations, federal election law violations, procurement fraud, the list goes on. 2007, lockheed agreed to pay -- repay the federal government $2 $265 billion for overbilling on the f-35 program. okay. what -- and lockheed martin, i shouldn't just point them out. they're one of many. what are we going to do after giving ceos of these defense companies huge salaries, tell them that they cannot continue to rip off the american people, what strategy do you have to prevent future fraud?
is this an issue that we should be concerned about? seems to me we should. >> well, senator, i think waste fraud and abuse is always something that should be front and center. it's my understanding in the acquisition process we have a number of policies that must be followed. and there are checks and balances along the way. it's my understanding miss lord is focusing on this, not only with specific contractors, but across the department. >> mr. gibson, would it be fair to say that we have not been terribly successful up to this point, that virtually every major defense contractor has had to reach settlements or has been fined for fraudulent activities. >> senator, i really don't have anything to base an answer on whether it's success or failure. >> are you concerned that virtually every major defense contractor -- >> senator, i would say that anytime we have waste fraud and
abuse i am concerned. >> all right. and can you tell me that this will be a major priority? if a defense contractor repeatedly engages in fraud, and i've just listed some of what one company did, that maybe they should know that they cannot continue to get away with that with impunity? >> well, senator, i know this is a priority of miss lord. and i fully support and am willing to do what we can on our side to help her in achieving this. i'll certainly pass this along, your passion for this issue. >> which takes me to the third issue. the ceo salaries, talked about fraud. now i want to talk about cost overruns. let me read from the geo selected acquisition report of 2017. quote, "a dod currently has an acquisition portfolio comprised of 78 programs costing
$1.46 trillion. of this total roughly 484 billion is due to cost growth above the original procurement estimate. 259 billion of this cost growth occurred after programs had already begun production. according to gao many d.o.d. programs fall short of cost schedule and performance expectations, meaning d.o.d. pays more than anticipated by less than expected, and in some cases, delivers less capability to the war fighter." major crisis, what are we doing about it, mr. norquist, cost overruns. >> the disruption to the budget. if you're expecting a program to cost a certain amount, taking this from the perspective of the cfo, goes up over time, you're disrupting other plans and expectations you had. we have organizations whose expertise is cost estimating and
trying to bring more accurate discipline to the budget process. >> no, excuse me, i don't think that is the major issue. the major issue, if i work out a contract with you -- i used to be a mayor. we went out with competitive bidding. we had a contractor come in, and we're going to do the streets of the city of burlington for $3 million. three months later the guy comes and says, it's $5 million. we don't say, hey, that's fine, we say, sorry, that's not going to happen. what are we doing with the cost overruns? >> i was going to break down the challenges into three parts. the first one is on the government side you made a wrong estimate as to what the work was going to cost. >> right. >> we can fix that and we have organizations with that expertise to try and do that. >> what do we mean we can fix that? if i tell you i'm going to do something for a billion and i come back to you a year later and say it's a billion 1/2, what's your response? >> this is where we have to end up, contracting world, outside of financial management.
so i apologize. the question becomes what changed? if the answer was on the government side i changed the requirement, then that's -- that's a requirements creep, the answer is, have i started to ask the person different things? and then a necessary requirement change -- >> what happens if i haven't changed my requirement? >> if it's a firm fixed price contract, for example, then in the level which i deal with it, the answer is, you bid a price, that's what you're going to perform it for. >> has the d.o.d. done that? >> we used firm price fixed contracts and we hold the vendors -- i have to defer to our lead for contracting, when she talks about cost plus other contracts which are challenged by the type of issue you raise. >> is your argument that most of these cost overruns are the responsibility of the d.o.d. who has changed the nature of the contract? >> no, but it's one of the contributing factor. you can do best estimates and hold vendors accountable, those
are the three lanes of how to break the problem down. >> what happens? tell me what we do when somebody says, hey, sorry, you have to give me more money for the same contract that i agreed to? >> that's the contracting officer, and i can't speak to that well. i would defer to undersecretary -- >> is that an important issue? >> it's very important. in the types of contracts i deal with in the financial committee, which are smaller, you're ending up with it's a firm fixed contract, this is what you said you were going to do, that's where we are. unless it's an issue on error on our side, you're held accountable. >> i apologize mr. chairman, what i would like to get back from you is your ideas of what we can do about excessive ceo salaries. >> thank you. i want to thank everybody for their questions. i want to thank you for your testimony. i do want to note that this is the first time that anybody's made this effort to do this
complete audit of the defense department, even though it's been a requirement for i think 14 years. so congratulations on that. i appreciated the comments today about needing a capital budget. i think absolutely every department in the federal government needs a capital budget. i have kind of a pet peeve on national parks as i grew up in some of the national parks, wyoming has yellow stone, the first national park, and i was always disconcerted that they were running out of money in august and talking about shutting down the park, which is the main season. so i asked them for their list of expenditures, which they couldn't give me. but i'm pleased that with pressure, after just 20 years, i have a list of not only yellow stone park, but every single park in the united states, the facilities they've got, the age of them, the costs to do them, the cost of maintenance, and i'm hoping we can continue that, and
get that into every department of the government and begin to manage what we have, having an audit is a beginning part of that. i'm also pushing for a biennial budgeting. every agency could spend more effectively if they knew advance, october 1st or whatever date, how much money they have to spend over the next two years. there's substantial savings just in not trying to spend up that last amount of money in the last portion of each year. ask i'm hopeful that if we break it down so that we only cover half of the appropriations each year, but for a two-year period, that we can get a lot more scrutiny and do what we're actually buying. and as well as having the people be able to spend things more
effectively. now, you gave some examples about the improved financial management in terms of costs to senator boozman. i appreciate that. senator wyden asked some questions about when this process would have a clean audit. of course we're hoping for a clean audit much before ten years. but the public's understanding of a clean audit, i think's a little bit misleading. what we're talking about is getting improvement to the point of perfection. and typically nobody gets to perfection. if they do, then our auditors maybe aren't doing their job. there's always something that ought to be reviewed. and every business, including the military, has to keep reinventing itself, and are, because of changing conditions around the world. and that requires doing things differently. when you start doing things
differently, the audit's going to turn up some different things that maybe shouldn't have happened, but that are correctable. unless we do these audits, which the purpose of them isn't to play gotcha with the department. that's not what's supposed to be done with it. what it's supposed to do is to reduce errors as much as possible and come up with better business plans. so that the objectives for, you know, what we're funding actually get accomplished. i'm a chairman of the budget committee, and i'm just floored by how much money it is that we spend. i really have no concept for trillions. aisle still having trouble with billions. and i thought i finally mastered millions, but i'm not sure about that yet either. but we spend trillions. and that's so much money that there isn't any business in america or in the world that handles that kind of dollars,
especially every year. and so our challenges are before us. and this is kind of a first step. i want to congratulate you for taking the effort, and i want to thank the committee for the interest that they've had in what you're doing. and i also want to, again, thank you for the promptness of your response to my questions. now, the hearing will stay open so that anybody that wants to submit some additional questions can, until close of business tomorrow, and hopefully we'll get a quick response from you on those as well. so thank you very much. this hearing is adjourned. [inaudible conversations]