argument. the issue is voting rights in ohio and whether the state can purge voters from the rolls for failing to vote in successive elections. the c-span bus continues its 50 capitals tour this month with stops in raleigh, columbia, atlanta, and montgomery. on each visit we'll speak with state officials during our live washington journal program. follow the tour and join us wednesday at 9:30 eastern for our stop in raleigh, north carolina, where our guest is josh stein, attorney general. defense department comptroller david norquist testified before the house armed services committee earlier this week about pentagon finances and auditing the pentagon budget. this is an hour and 40 minutes.

the committee will come to order. the committee welcomes mr. david norquist, the undersecretary of defense, comptroller, and chief financial officer as our witness today. the topic is the audit of the department of defense, which by law begins this fiscal year. and i would just say it's not by accident that the committee will start our year on this topic. requiring that the department conduct an audit has been a bipartisan priority of this committee for some time. the chief financial officer act of 1990 required all federal departments conduct an annual financial audit and partly out of frustration with a lack of progress toward that end at the department of defense, the 2010 required the financial statements of the department be ready for audit by september 30,

2017. this committee's panel on defense financial management and reform put close scrutiny on the department's efforts and issued a number of recommendations that have enabled us to arrive at this point. the 2014 ndea required a full audit be conducted of the department's fy-18 financial statements, the results of which are to be delivered next year. i want to commend the chairman for his expertise and persistence on this issue, as well as mr. courtney, who is also a member of the audit panel several years ago. they will both be glad to know we have had additional members join this committee in recent years who can also contribute their background and experience to this issue as it moves ahead. this issue is important. members of this committee hear

evidence every week that we are not providing our military with the funding they need to carry out the missions they have been assigned. we must spend more. at the same time, we have a responsibility the american people to see that each of their tax dollars being spent to protect them is being spent in a transparent way with appropriate accountability. we should never assume that an audit will solve all the problems of waste and inefficiency, but it seems to me a that an essential requirement of spending money smarter is knowing with certainty how it is being spent. it is likely that the result of the first audit will not be pretty. but those results will help direct us all, congress and the department, on where we need to apply our efforts to improve. this issue is important. and this committee will continue to pursue it. the ranking member is recognized. >> thank you, mr. chairman.

by and large, i would simply repeat word for word the opening statement of the chairman. so in the interest of time, i won't do that and will simplify it by saying this is enormously important. there are a lot of concerns at the pentagon, and there's really two big issues here. one, as the chairman mentioned, we are in a time of tight resources and very great needs, and that means we have to get everything we can out of every dollar we spend. there are many, many issues that this committee has covered that make that clear. and second, if we can't explain where we spend the money in the pentagon, we are failing in that first mission. i know it's a lot of money. i know it's a big bureaucracy, there's a lot going on, but we ought to be able to do an audit that tells us where we're spending the money. it's just that simple. that's your mission. it's the pentagon's mission.

i want to specifically thank mr. conway for his great leadership in this issue. who knew having an accountant on the committee would be critical? actually, most people should have known that. but he's done a great job on this issue. appreciate his leadership. everybody on this committee would just feel great if at some point we can say the pentagon has been audited. it has happened some 20 years after we started trying to make it happen. i think we're close. i think we can get there. i look forward to hearing your testimony about how we're progressing in that. and i thank the chairman for his leadership on this very important issue. >> i thank the gentleman. mr. norquist, welcome. without objection, your full written statement will be made part of the record, and you are recognized to make any oral comments you wish to make. >> thank you, mr. chairman. chairman thornberry, ranking member smith, and members of the committee, thank you for the

opportunity to provide an overview of the department's financial statement progress and plans. i appreciate your committee's long and unwavering support for this effort. i also want to thank congressman conway for his leadership over the years related to the audit. his direction of the committee's 2011 panel on financial management and auditability helped the department maintain its focus on audit. when a president made a promise to the american people to rebuild the armed forces he also made a commitment to start the audit. inside the department of defense, secretary mattis and deputy secretary shanahan have set a tone from the top that embraces the audit as part of their vision to bring business reform to the department of defense. i know you have had many hearings where witnesses have told you they support the start of an audit eventually. this hearing is different. we have started the audit. but we are only able to have today's hearing with the department of defense under its first full financial statement audit because of this

committee's continued support. i should note that audits themselves are not new to the department of defense. numerous audits covering program performance and contract costs are completed each year by the accountability office, defense contract audit agency, the department of defense office of the inspector general, and the service audit agencies. dcaa employs over 4,000 auditors to perform contract audits focused on identitying inappropriate charges to the government. however, this is the first time that the department is undergoing a full financial statement audit. a financial statement audit is comprehensive. it occurs annually and covers more than financial management. for example, financial statement audits include very fine count, location, and condition of military equipment, real property and inventory. it tests the security vulnerabilities of our business systems and validates the accuracy of personnel records

and actions, such as promotions and separations. the department of defense anticipates that this spring and early summer we'll have approximately 1,200 financial statement auditors assessing whether our books and records present a true and accurate picture of our financial condition and results of our operations in accordance with accounting standards. these financial statement audits compliment but are distinct from program performance or contract audits. based on my experience at the department of homeland security, it will take time to implement all the processes and system changes necessary to pass the audit. it took the department of homeland security, a relatively new and smaller enterprise, about ten years to get its first opinion. but we don't have to wait for a clean opinion to see the benefits of the audit. the financial statement audit helps drive improvements to standardize our business processes and improve the quality of our data. just like private sector companies and other federal agencies, the department of

defense prepares financial statements every year to report assets, liabilities, revenues, and expenses. though not a corporation, dod owes accountability to the american people. the taxpayers deserve the same level of confidence that the financial statements present a true and accurate position, a picture of its financial condition and operations. transparency, accountability, and business process reform are some of the benefits of a financial statement audit. regarding transparency, the audit improves the quality of our financial statements and the underlying data we make available to the public. and dod's progress will also directly contribute to an audit opinion on the entire federal government's assets and liabilities. with regard to accounting, the audit will highlight areas we need to improve accountability.

for example, during initial audit the army found 39 blackhawk helicopters that had not been properly recorded in its property system. the air force identified 478 buildings and structures that were not in its real property system. by fixing the property records, we can help demonstrate the accountability of our assets. in other cases, as the department invests in new business systems, we be able to obtain independent awe or the feedback on that system's compliance so we can better hold those vendors accountable for their solutions. third, the combination of better data, business process reengineering, and the use of modern data analytics support's congress' vision of the chief management officer position and the department's effort to bring business reforms to its operations. these reforms will lead to business operations savings that can be reinvested in legality. the kcost of performing the audt

will be about $367 million in fy-2018. it will perform the amount covered the audit fees to the accounting firms and the infrastructure including the cost of the government salaries of the people supporting the audit of about $186 million. the $181 million in audit contract costs is one 30th of 1% of the dod budget. and as a percentage of revenue is equal to or less than a fortune 500 company pays for their auditors. in addition, we anticipate spending about $551 million in 2018 fixing problems identified by the auditors. the dod consolidated audit will be one of the largest audits ever undertaken and comprises more than 24 standalone audits and overarching consolidated audit.

dod is sustaining clean opinions for nine standalone audits. they are conducted by ipa firms with the ig performing the consolidated audit, and all the contract audits have been awarded and the auditors have begun to arrive. in order to track progress, the department has established a tool and a process to capture, prioritize, assign responsibility for, and develop corrective actions for audit findings. each year the auditors will assess and report on whether the department has addressed the findings. going forward, we will measure progress and report on it towards achieving a positive opinion by using the number of findings resolved. in closing, i want to thank this committee for its continued focus on the importance of a dod audit. your oversight through the years has been a catalyst, and we appreciate the partnership we enjoy with you and the committee staff on this important process. with your oversight and under this administration's leadership, we will be a department not only under audit

but improving year after year. we improve budget stability and technology and funding to findings remains critical in moving the department towards achieving a positive opinion. i thank you and look forward to your questions. >> thank you, sir. and i appreciate your differentiate kwhag we'ing here talking about a financial audit with contract audits. i might just highlight that we had a number of provisions to reform the contract process in the last year's defense authorization bill, and hopefully that will improve as well. i just want to ask you one question. i was interested to read where a retired general says basically this audit is not worth doing. as you highlight, it requires going and checking the real property. you've got to check and see whether all the weapons and equipment are accounted for, the various records and so forth.

it's going to be expensive. and his point basically is it's not worth the cost. you're doing it because the law requires you to, understand, but what would be your response to the argument that the cost is more than the benefit of doing a full financial audit of the department? >> sure. i would first respond. he noted it's costing over $900 million. the amount we're paying the ipa is $181 million is 1/30th of 1% percent of the budget. but on the scale of the enterprise, that type of money for accountability is is money well spent. the additional money we have talked about is to fix problems that we find. now this is always a choice going forward. if we can live with the problem and fix it but i don't think the problem is is the right way forward.

i support the direction to conduct the audit, do the findings. the article said that it's expensive because it covers so much. the answer is, yes. that's the point. one of the things that the law requires is that we do information security of our business systems. this is the fisma and fiscam standards. the audits are done to those. we'll be able to understand the weaknesses and do people more to hold people accountable for closing vulnerabilities in our systems. you would want that anyhow. you'd want that done under any circumstance. when we find those, you'll want the department to be closing them. you talked about contract audits. the defense financial statement is large. 1,200 awe auditors. we have 4,000 who look at contractors. so on the scale of what we spend looking at contractors, the size of the team that we look at the government is appropriate and proportionate.

lastly, the biggest concern is a statement that the department is not a corporation and does not need to undergo a financial audit. first of all, the law requires a financial audit, and more importantly, i think the taxpayers deserve at least the same level of confidence as a shareholder in the use of the money. >> thank you. mr. smith. >> i don't have a question. i just want to totally agree with the remarks you just made. to say it's not worth doing is saying that we have screwed it up so bad for so long that the cost of fixing it has just become overwhelming, so let us just keep screwing it up. and i get that the up front cost is going to be enormous. but long term, the benefits are are exactly as you describe. if we got to suck it up for a couple years and absorb some cost to get back on track, it's going to make significant improvements. all of the work on acquisition reform that i know the chairman

and i and many others have done can be so much better informed if we have this information. we can say, gosh, here's an area that instead of -- so when we pass legislation aimed at making the acquisition process better, if we have this full audit, that legislation has a much better chance of actually accomplishing that task. so, yeah, it's pretty bad. and in some ways you'd like to sort of close your eyes and say let's just not deal with it. but it's just too important for all the reasons you stated. i completely agree with that statement. i applaud your commitment to doing this and stand ready to have the committee help in any way we can. i'll yield back my time. but i have nothing further. >> my only comment is to reenforce your point about the better data to support information. the primary thing an audit promises is better data accuracy and accountability. when many of the reforms depend

on the accuracy of the data, not having it complicates those efforts. >> mr. jones. >> mr. chairman, thank you. i have been here 22 years, and this is the best news of hoping for something good to come from this effort. i commend my friends on my side and the other side who worked with the chairman and ranking member to put this effort together. i never will forget donald rumsfeld, the former secretary of defense, sitting where you are, telling this committee that he will account for every dollar of the taxpayer and how it's going to be spent at the department of defense. he might have meant well, but it never happened, obviously. that's why you're here today, because we've never been able to do anything to take a problem and even in a small way make it better. i've got one question.

it does deal not directly with you, but because of your position and your oversight, of all the articles i have seen about waste in the 22 years i have been here, probably this is in the top four or five. two years ago, the u.s. army had accounts by trillions of dollars. the defense department inspector general in a report two years ago said the army made a $2.8 trillion wrongful adjustments to accounting entries in one quarter alone in 2015 and $6.5 trillion for the year. yet the army lacked receipts or invoices to support these numbers or simply made them up. this would be something i would think would be under your

department's jurisdiction if it happened within the system. this is one of those things that i would like to ask you, how in the world do you fix a problem when you keep funding the problem? there's got to be -- you fellow cpas and accountants can give me some assurance that when stories like this go public and the taxpayer, that's why they are so frustrated with congress and why we have an 18% approval rating. i would hope this would be the kind of situation in a short period of time gibe dealt with d give me hope that this would be dealt with and somebody instead of saying that this happened and

that happened, but we keep funding it. i just don't know how you catch up when you keep funding the problem. >> let me address that. that's a very important one. one of the issues you're talking about relates to journal vouchers which occurs after the money is spent is. when you see in the article that says trillions of dollars and you realize we only receive about $600 billion in a year, there's a mismatch in the story. and what this refers to is we have systems that do not automatically pass data from one to the other. so the army goes in and at the end of their financial from the property book and writes it into the general ledger. that's a journal voucher entry that could be hundreds of billions of dollars. depending on that property. because they don't have an entry, that whole entry is considered unsupported. from a management point of view, this is bad. it's not the same thing as being able to account for the money congress is giving you to spend, but it's still a problem that needs to be fixed.

part of that relates to systems built at stove pipes. in a private sector, they wouldn't talk to each other. they wouldn't field a system automatically passing up its da data. we are addressing that challenge. one of my concerns is only by eliminating the types of ones that are just an entry issue can you find underlying issues that are hidden among inaccurate data. so it's important. i wouldn't want the taxpayer to confuse that with a loss of something like trillions of dollars. that wouldn't be accurate. but it's an accounting problem that does need to be solved because it can help hide other underlying issues. >> mr. norquist, thank you very much. i will tell you that i might not be here when you resolve the problem, but i'll still be reading the paper. i wish you and your staff the very best. >> thank you, mr. chairman. >> mr. carvajal. >> thank you, mr. chairman. thank you, mr. norquist, for being here today. you know, this is my first year in congress, and i will tell you that oftentimes i'm asked for my

observations. i served in local government for over 24 years. and the most shocking thing about being in congress is that there's never been a comprehensive audit of the dod. it's just outright ridiculous. there's no other way of putting it. it's been said that if you can't measure it, you can't evaluate it. and i think this is one of the most significant issues facing the american people and being able to trust to adequately fund our military and our department of defense. i think if we don't get it together we're going to lose the american people's trust in what we're trying to do here. there's no question as to how daunting this task is going to be. the stakes are high. last year congress approved almost $700 billion from the

department of defense, and we owe it to the taxpayers to provide oversight and accountability over their tax dollars. mr. norquist, in your written testimony you mentioned that for years the department has received disclaimer of opinion on dod-wide financial statements. because it was not able to provide the evidence to support its financial information. and these disclaimers were based on management's assertions and not based on independent audit testing. can you provide some clarification and detail on this issue? what do you mean when you say it was based on management management assertions and not independent audit testing? it was conducted by independent public accountants. if you could shed some light on that, i would greatly appreciate

it. >> there are a number of parts of the department of defense that have been under audit for a number of years. defense finance and accounting service. the commissaries, pension plans, and so forth. many of those receive clean audit opinions. when you don't have an oud or the's opinion, management is not able to represent that everything is in order. so they don't even begin the testing. they just say you failed. this is one of the reasons why i have been a strong advocate and supporter of the audit. when i was at the department of homeland security, when i arrived there, they already had the audit the first year. but the amount of information you received from the audit as management in order to fix things was tremendous. so i understand your concern of an entity that doesn't have an audit, that will provide a lot of useful information, and i think operating without it, there's a limit to how much you can reform and fix without that independent check validating that what was done was done

correctly and effectively. i think that's the biggest transition we're going to see from this year to previous years. >> thank you. once we see a department of defense audit for fiscal year 2018, how will dod track its process for correcting errors? specifically, how will the audit remediation process be executed and what is the time line for analysis, execution, and implementation of lessons learns from the audit? >> we have set is up a data set where every time there's a finding by the audit, notice of finding and recommendations and it's made up of several conditions. the auditors will enter that into the database. we'll have their view for every entity of each of the findings. they will have codes according to the type. was it an i.t. system, was it related to property? we'll have an organization or individual associated with that nfr and the responsibility to correct it.

this is important because it gets us past the habit of saying does the document have a clean opinion, no, and then no one feeling they are accountable. here, all these findings will be associated with an office or individual who will be responsible for the corrective action plan. i will be able to come back and report to you each year which of those were closed and which of those were not, who we should write to and say good job and who either needs more help or more encouragement to get their piece of it done. we'll be able to track it finding by finding and hold accountable over time. this is again one of the tools that the audit gives us as we move from the higher level. it's hard to solve to specific things. one of the things i like about that is that that you may have a large number of findings. how do i fix this? and this is yes. but you can fix those two, that's all that you need to do.

as more people do that, the whole organization moves in the right direction. >> thank you, mr. chairman. i yield back. >> mr. lo bianco. >> thank you. i'd like to join with my colleagues in saying how much we look forward to your efforts and wish you good luck. >> thank you. >> certainly long overdue. i want to take the opportunity to thank and applaud mr. conway for being so dogged with his hard work. with that, i yield my time to mr. conway. >> thank you. thank you for where you have gotten us to today. the thousands and thousands of man-hours, people-hours, however you want to refer to it, that got you to however flawed we are at this point. we're far better off than when i first took up this task. i have seen that progress. got a long way to go. don't want to overpromise and underdeliver. the '18 audit is unlikely to be clean opinion given the scope of what it has to be done. but we are so much further along

based on the leadership that you and your team have provided and the hard work of the folks who get up and go to work to face this doesn'ting problem like sisyphus, so please tell them thank you. we'll try to keep that process moving forward and not do anything that hampers from a legislative standpoint because we're frustrated it hasn't gotten done sooner. we have to recognize it is getting done. you talked about findings. that's got a certain definition to you. explain to the committee what a finding really is, what that means from an auditor's standpoint and why it's important those get fixed? >> what the auditor does is they are holding the department accountable against certain well-recognized standards. so the finding can consist of you were unable to produce the records to support this transaction, or we looked at

your property system and it indicated you should have 100 of these. when we walked the floor, there were 95. there are basically things that are wrong in the way that either we are accounting for assets or recording. so those are items that are priorities for us to fix. >> would those also include weaknesses in internal controls? you mentioned a circumstance where you had trillions of dollars of journal entries going back and forth. that's a failure of internal control. the auditors are looking at your system. those findings would include weaknesses or failures within the internal control system? >> correct. >> while we won't get all the way to a clean opinion soon, you mentioned a couple reasons why it was important that we do this in value along the way. can you expand on the 39 helicopters or the 400 buildings and why not knowing -- i mean, we obviously knew -- the pilots flying those 39 helicopters knew they were there. somewhere further up the management chain they

disappeared from inventory and may not have known they were there. 400 buildings seem like a big deal because they weren't moving. at some point we have to address that. can you talk to us about value added along this path that we will get as a result of doing these audits? >> absolutely. in order to get a clean opinion, there's a number of steps you have to solve. even along the way, fixing the pieces along the way produce a tremendous benefit. so if you think of the inventory in the wear house of how many spare parts or munitions you have, those were delivered by the vendor but not entered which meant folks anticipating using them were waiting to take advantage of it. or if you have the case of the buildings, the person on the base may know they are there, but somebody at headquarters trying to figure out do we have enough square footage is operating with incomplete information. so as the leadership mentioned at the beginning, accurate data helps drive more accurate decisionmaking. there's a couple other benefits.

disa, one of the agency that received a clean opinion on one of its funds, modified on the other, they were able to return $230 million to the services. it lowered bills and allowed them to spend the money on operations and readiness because it had a more accurate understanding and management of finances. likewise identifying errors, the navy changed its process of how it handed information to dfas to be more automated, reducing the amount of work dfas had to do for them. that saved them $65 million. so while we are focused on data accuracy, there are financial savings that come and there are other things that are a benefit for the men and women of the armed forces. the air force, when they were doing a walk-through, discovered their enlistment records were being set up incorrectly for new recruits as to whether they were six- or four-year enlistments. they are updating manually hundreds of records every year as people have arrived because the entry was done incorrectly

at the beginning. they went back to do a system change to make sure that didn't happen, reduced by 80% the manpower accuracy issues. so it benefits the troops and better pay and benefits accuracy. >> thank you. mr. o'halloran. >> thank you, mr. chairman. first of all, i want to thank all those who have work on this over the past decades. as a new person like mr. carvajal and all those front-row people, i'm kind of -- after having read the information on this, i'm kind of shocked. >> mm-hmm. >> as a new person here, to look at decade after decade and trillions of dollars after trillions of dollars and apparently no real rush to get to the point where we have an audit, a meaningful audit, is disturbing. but i do want the to thank you for being here to discuss this critical issue for our war

fighters and american taxpayers, and thank you for your service. i wanted to echo my colleagues who have rightfully stated proper oversight is long overdue at dod. waste, fraud, abuse, have no place at any agency, especially not when it comes to guaranteeing our national security and readiness. every dollar wasted or fraudulently spent is a dollar lost to our war fighters. they deserve better, and i look forward to working with you and the rest of the committee to increase transparency and financial integrity. i also share concerns about what we can expect from this process. as you know, the gao has stated dod has not yet demonstrated that its leadership has ability to achieve financial reform. the dod lacks a specific cadre of managers with qualifications and level of expertise needed to lead reform throughout the department.

additionally, having looked at what occurred in the financial industry over time, i have concerns have how we're going to go about guaranteeing that this marriage between the dod and the different auditors is one that's going to be transparent enough for us to understand that the taxpayers getting the appropriate audits that we should be getting, because as you know, what occurred in the financial industry was that basically the auditors did what the people being audited wanted them to do so that they can get the next contract the next time it was around or keep that contract. i really want to know how we're going to watch that issue and has dod developed not only a process to guarantee we're getting what we say we're going to get, but brought on additional personnel with demonstrated financial

experience, what barriers continue to impact the ability to retract, retain, and develop qualified personnel and retain is a very important issue when it comes to these types of things, and how will we verify the audits in the long term? >> let me cover a couple points you brought up. i'll start with the independence of the auditors. that's a central one we had to address the very beginning. the auditors do not report to the army, navy, air force, they do not report to me. they report to the i.g. the i.g. is the contracting officer, oversees them, and makes decisions about what they do, so they have the same protected independence of the i.g. but it's also a reason why we split the audit into lots of pieces. one is an auditor cannot audit an agency if they have consulting work there. so finding an audit where no consulting work anywhere in the department of defense would be somewhat limited. but if you break it army, navy, air force, disa, so forth, you'll find firms that are and you'll find multiple ones you can find competition.

so part of having the 24 or more separate audits is, first, you get people who are independent, and second, we have sustained the competition. if there's an auditor not performing, there's multiple others with dod audit experience that they can go look to. there was a question, why not use one large audit? my answer is you've created a monopoly. we would never have they learned our business process be able to fund another auditor to compete. then i'd be explaining why the audit costs went through the ceiling. we tried to pay attention to the concerns you've raised, and i think the i.g. function is a tremendous help for us maintaining that independence. >> just to that point, because my time is running short. i appreciate the i.g. and its independence, but in long run, it's been around for a long time. a lot of things have been going on far long time, whether it's fraud or abuse or just lack of information, and it hasn't come to anybody's attention of how to correct that.

so just the idea that the i.g. is going to be the independent evaluator of the process doesn't guarantee the taxpayer of america that this relationship is not going to be one that is controlled by those that know and can manipulate the system versus those that are responsible for making sure that we get what we are paying for. and it's verifiable. so i would like to talk to you a little bit more in depth about just where that goes. i yield back. >> chairman connolly? >> so, thank you. david, dfas is an integral part of the accounting systems. can you talk to the committee about the audit and the conflict between the services dfa sproshgs vided to the army, navy, marine corps, on a standalone basis, if those were going separately that service provided would be really

disruptive and inefficient? can you talk to the committee about how the team is looking at solving that issue with respect to dfas? >> sure. we have a number of places where an audit of one of our entities would extend into the other. the branches have financial processes that extend into the finance accounting service. so the way that we address that is we have the acronym that's an audit of that organization support to the others that external auditors can rely on. otherwise, we would be paying tr the three or four auditors to show up and reaudit a single step. it shows up in df ashas and ammunition storage where several are held in one place and the answer is rather than each auditor coming in we'll do a similar thing over ammunition storage and say you can all rely on this audit piece so you don't have duplication of work.

>> you talked about the accountability you're going to create with this database findings that are out there. create with these findings out there. can you talk to us about the accountability piece? you have two groups of folks that have been responsible for correcting or addressing the findings you have. you have civilian folks as well as military people. talk to us about the carrots and sticks available to you to hold people accountable within your system for getting those findings resolved to the satisfaction of the auditor. >> there's a limit to them. we may need to work with this committee, but this was one of the things brought up before i was nominated to say how do you motivate people in a federal agency to stay focused on fixing things when you lack incentives or controls you have in the private sector? there's a couple things. one is being able to clearly identify who is accountable.

it's one of the first steps. that's the part the database gives us so people know who it's on. the second is audit support shows up in people's performance evaluations, so there's no way around that comment being made about your contribution or success, so that helps to drive it. both the civilian and the military will have -- there are limits to how far we can go compared to a private sector, but i think the transparency and accountability knowing -- one of your biggest challenges is knowing it's their responsibility so fixing that and being very clear whose responsibility that is helps to drive that performance improvement, but there are limits to it that i recognize. >> that database is a big improvement from where we have been in the past. sometimes the tasks just are so daunting that you can get away with not addressing it. but having it broken down to bite-size pieces, i think we will see progress over the

coming future. to mr. o'halloran's issue, these cpa firms that provide the audit are held to professional standards by their own industry and by the state boards of accountancy. so it's not like you don't have those without oversight from professional standards that they would have to ascribe to if they were working a private sector audit as well. >> they are audited on whether or not they met those audit standards. they will have to produce to an external firm evidence they did their work to an acceptable standard. >> so we're all humans. there's been some failures in the past. there are professionals and professional standards that they are held to. >> correct. >> a quick anecdote. part of the issue has been over this time frame is making sure you have the right tone from the top. it's been transferred by the current administration. i was encouraged by the experience i had in hawaii

a while back. ist touring the "uss texas," a submarine. we were in the galley doing a town hall meeting for the enlisted guys. somewhere during that conversation, one of the petty officers asked me, said congressman, how is the audit going, department of defense? i thought two things. you guys planted that guy down there because you knew i would be on board that ship, or you have some bright enlisted guys who are paying attention to conversations that go up the food chain of the department of defense. if the issue of auditability has gotten down to a petty officer in texas, we must be making some progress. with that, i yield back. >> ms. davis. >> and thank you, as well, mr. norquist, and the efforts that are going in there. it's been a longstanding problem, and we all know that. and we all know that. i wanted you to speak a little bit -- because i think we have addressed a few of the process

issues -- but particularly, the concerns around cultural resistance to change. and if you could, i think one of the things that we're very aware of and any large bureaucracy that there are a lot of issues of retribution for people trying to do the right thing and other people don't want them to. that's a concern. sexual harassment at the pentagon is a big concern. there are all these issues that go on in people's workplaces and the cultural resistance to change is one that really has to be monitored closely. and how are you dealing with that? how are you expecting to be able to bring everybody to the table on these issues and get the kind of buy-in that's necessary without individuals picking one another off? >> the culture of resistance, i mean, no one wants to be awe

diplomated. i don't know how many witnesses you've come here tell you excitedly, hey, i'm under audit today. it's also that in order to fix the findings, we are taking systems and processes that were built to maximize support to one thing and requiring them to pay attention to the functions around them that they work with. and that can be a challenge because someone says, this is how it disrupts it. there's a couple factors that go into this. the first is the tone from the top. that comes from the deputy secretary and the secretary who are unambiguously clear, this is at accountability. you are responsible for this. these are where the property standards come from. so it's very clear running up your chain to say i don't want to do this is not going to run into success. the other one is the congress has been very clear. the other place you go is to tell them to make them stop. and the likelihood of someone coming to congress and saying, please make them stop the audit and getting a warm and fuzzy hearing is pretty limited.

so those two things helped create the realization that the organization will need to change. the second part of that process is explaining to them the benefit of the change. in many case, we have labor-intensive processes that are -- where data is transferred from one place to the other and you have to fix errors because it wasn't done right at the b beginning. or it was only filled in with the fields that the people needed at the beginning. if you can explain that, we get that fixed and we're going to spend less time doing this and more time on the things you believe is your core mission. yes, it's a little bit of work. and when you're asked for records you don't have easy access to, it's a challenge. but over time, this will make your life easier. we have to work that office by office and organization by organization. but as you pointed out, this is as much changing people's views about how to do things so they understand the importance. the third factor is the audit is annual. if you did this once and came back in ten years, i don't know you'd have the same incentive as

the realization is they are coming back in six to nine months, so you can make the change and you can watch them find the same things again. so that third factor that -- what makes the financial statement is it repeats. they are just expecting you to change the availability to provide an answer. >> do you anticipate any need for feedback system so everyone who is engaged in this can be getting their input all along the way. some of that may be anonymous. >> we need the feedback. one of the things i have tried to draw attention to is because the audit is going to repeat, what's important is we be able to sustain this. so if you're given a task where the resistance is this is way too labor intensive, stop. let's figure out why answering that auditor request is labor intensive and fix the way we store the data or do the check so we can answer them efficiently every year. i would rather take the finding the first year than do some

expensive effort that i'm going to have to repeat the next year. so if we're not able to find the records efficiently, get a data warehouse, put if record where they can be easily search sod next year it's very quick process. we want to make this efficient over time, and that's another way of reducing some of the resistance. the people have a way of saying i don't understand why this is happening this way. the answer is maybe we can do it differently. but we're still going to have to meet the standards of the audit. >> speaking of the auditors, obviously you're going to be using a lot of different ways of responding to some of the concerns that have been existing for some time, is there anything in the training or preparation as you move forward that needs to be changed and that you're addressing as it relates to the way that people are approaching it? >> there's been a lot of effort on that. my predecessor, bob hale, set up a relatively robust training program for the financial

management community that has been focused on introducing audits and audit readiness as a result of input from committees and others. extending that thoroughly has been one of our challenges. there's been some training, but those areas are equally affected. >> ms. hartsler. >> thank you, mr. chairman. thank you, mr. norquist. this is a very encouraging day, a day we've been waiting on a long time. i certainly want to commend the char chairman and ranking member and my colleague, mr. conway, for his leadership on this. certainly, we are facing so many threats around the world and we need more dollars to modernize and increase our readiness. but at the same time, i hear back home concerns about waste. and anytime there is waste, we need to make sure that it is rooted out and that we're investing our precious defense dollars where they need to go. so this process you're leading

is critical in this effort. so you noted that one of the chief benefits of the audit process is improved accountability of the assets and resources. i was wondering, are classified as assets p s part of the audit process? >> yes. classified programs are included. i'll also tell you that all of the defense intelligence agencies have standalone full-scope audits. and most of them have been under audit for three years. but being a classified program does not exempt you from the scope of the audit. >> will there be a separate addendum then that we in congress will be able to access to look that the portion? or how will there be accountability for the classified side? >> so for the standalone audits, those are classified. the ones for an intelligence organization. as for the others, i'd rather talk to you in a closed forum. >> okay. >> but we address all the classified programs. they're in the scope of the audit. >> how about oco? >> oco would be in the scope of

the audit. >> very good. in your testimony you said something here that caught my attention. of course, the cost is $367 million, which we've already talked about the long-term benefit of that investment in getting a handle on everything. but you go on to say you anticipate spending about $551 million this year, in fiscal year 2018, fixing problems identified. so could you expound on what problems you anticipate and what the presumptions were to come up with that figure? where do you get $551 million for fixing problems? >> sure. the number comes from talking to the services about what funding they have planned for this year and what did they have in the budget to address these requirements. and the types of requirements we're talking about are systems that have been already fielded that either they're not storing or transmitting the data properly. some of those changes are in

there. improvements in the way they inventory or store things. one of the steps involves the accuracy of the property records. each place they're improving their process or changing the underlying system or clearing up old types of data, those are the types of things that are driving those types of costs. >> sounds like the services already have a handle on what they know are problems. >> correct. >> and then they put a price tag to that. most of that is computer software? >> not most of it. that's just a pete iece of it. >> you said systems. >> it's a piece of it. it's not most of it, but the systems are certainly a piece of it. >> can you give more a specific breakdown on that? so you anticipate you're going to have to purchase so many more computer systems that talk to each other? and you say record management. so are you putting man-hours -- are you anticipating additional personnel to create written records?

i mean, get more specific, please. >> sure. i'm going to have to give you some of this for the record, but i'll try and talk you through what i can at this level. so when you're going through the audit, for many of them they've either done some work in advance or in some cases the auditors have done preliminary work before we got to the full-scope audit. so they had some indication of the types of challenges they face, and they've developed correction action plans for those, including modifying one system to allow them to be audit compliant and allow them to turn off systems that are not. so the financial systems costs that improve the accuracy of the data and in the long term may save us as we turn off the legacy systems. the second is improving their processes that allow them to be more accountable for their property. so they may be changing the way they store the information or store the assets to support the accountability depending on some of them maybe switching to bar

coding things that weren't so they can have clearer accountability of the status of each asset where they know where they are. some of it is the documentation behind it, making sure that's centralized in a way they can respond in a way that's complete. that's the types of at a high level the changes they're doing. >> i would just say we need to watch this and don't let them get more money for something that simply should be their job, doing their job. >> correct. mm-hmm. >> okay. thank you. yield back. >> ms. porter. >> thank you. i also want to thank you, mr. norquist. i'm very excited about this. we have hoped for this for years. i wanted to ask you a couple of questions about it. i think it was 2007 maybe i was sitting here on this committee and we had found out a lot of the weapons had been sent to iraq were not traceable anymore. i remember the person saying,

well, we didn't have enough auditors. i said something along the lines of, well, shouldn't we have auditors when we're spending this kind of money? so this sounds familiar to you, i'm sure. how did you decide on the number of auditors and what will you do if you discover that you need more? >> the number of auditors is our estimate based on what the contractors have proposed to do. they were given the scope of it. those contracts i believe allow for them to make adjustments over time. so that if there's a requirement for more. one of the things we want to do is make the best use of their time and their benefit to the taxpayer. unlike some audits where as soon as they run into a problem, they get to stop and say there's a problem, i'm done. the i.g. can say it would be useful to us if you dug deeper into the root cause behind it. that way we make sure we're not just fixing the symptoms. so they can drill down. my view is the auditor piece of this is like the reconnaissance -- it's the guys

who find you the issues, and that's a tremendous value to us. so if we need additional ones, i'm not hesitant to make sure we can get access to that. >> so they will not be constrained financially if you need that? you won't run up against a wall where there's no money left in the budget to put more people in if they need to? >> it would have to be something in the way that the contract had been written, but we would realign funds if we needed to. if they say they need additional resources, i would help the ig. >> that would be essential. i think it's going to be deeper and longer than you think. my understanding is right now is you're talking about 870 million and that's just for 2018? >> that's for 2018. >> how is the cr going to be impacting that? >> the cr creates pressure on us funding wise. i'm not going to stand in front of you and say if i don't get it we're going to stop the audits. we're not. we are going to go ahead with the audit. what it does is many of the people that i need focused on audit remediation are focused on

trying to split contracts. to accommodate the funding levels of the cr and many of the people that we need to have focusing on this are the funs who are also affected by the incremental nature of a cr. it also creates pressure more on the remediation side than the audit because we're significantly below either what this committee recommended or the president and we have to make tradeoffs within that space. but we will still proceed with the audit. >> then the other question i had is you talked about contractors having growing pains. and i think this article, you also said that we shouldn't be looking for like billions of savings. but it's always been kind of one of those understandings that if we actually did monitor these contracts over time that the waste and fraud and delays does add up to billions. so how will they experience growing pains? and why don't you think that ultimately over a period of time we actually could save really significant numbers? >> are you talking about saving numbers by auditing contractors?

>> if we do this work now, what will you be doing to make sure that contractors come in on time, we don't have cost delays? i know we have our work to do for the oversight, but i want to know how you think your role will play out. >> let me break that into three parts. first is the piece of the program manager overseeing it. that's not in the scope of the financial statement audit, but we support them with better quality data. the second, not inside this audit, but we have the defense contract audit agency that looks directly at billing. they recovered in 2016 i think $3.6 billion by looking at billings that were coming in and questioning charges. that keeps up. that we will continue to do. the third is the financial statement audit which focuses really on the department and indirectly on the contractors, but it's our payments to them. i think the place you're going to see the biggest reform opportunity over time is by allowing us to operate more like

a business. you think of improvements in the accuracy and completeness of the financial system and the role of the chief management officer bripgi bri bringing business reforms, being able to put in front of the cmo information closer to what their commercial counterpart would have allows them to make decisions. you're a $600 billion enterprise. better decision making can let you make better use of the dollars on a very large scale. i think you'll see that type of advantage in driving reform in the organization as we're able to do more on estimates costs or reforming the way we do something internally. those are some of the three. there will be some cost avoidance when you have better security against intrusion. >> i'm hoping we'll have more clarity when we have to make decisions, that we'll have more data to help us. >> yes. >> thank you so much. i yield back. >> thank you. many of us are familiar with the audit function in the private sector.

in preparing for this, i came across an acronym called an ipa, which from my understanding is a really good type of beer. but i think you mean something different. these are major highly reputable private sector accounting firms perform audits for large organizations across the world. have i got that right? >> correct. ernst & young, et cetera. >> what standard do they use when they perform their audit? >> there is a federal board that sets the auditing standards. they basically start with the commercial standards and then they add some modifications. for example, to defend the power of the purse of the u.s. congress, we have budgetary rules that do not exist in the private sector. they have a series of accounting standards for how we account for obligations, disbursements, commitments, things that matter to us in managing the money consistent with congress. so there are changes, all the other federal agencies follow them as well, but there's an

accounting standards board that does that. >> let me talk to you about continuing resolutions for a second. recently the secretary of the navy has said publicly that since the budget control act was passed, the navy itself, the navy alone has lost or we've wasted $4 billion as a result of continuing resolutions and budget uncertainty. do you believe the audit will show this due to continuing resolutions? >> i think the audit will show you some of the problems out of the disruption from the cr. normally you have a year to spend money. one of the things that we tend not to like about federal agencies is that the fourth quarter, because of the way federal money works -- if you don't spend it, you lose it. sort of unusual thing we do in the federal government. well, if the cr says wait, wait, wait, and then when you're down to a couple months left in the year, here, have it all, spend, spend, spend.

and if you negotiate a good price, and you may now be outside the window of when you negotiated an effective price. your plans for contracting and so forth get compressed. so i think some of the disruptions you see that are driven by the audit will help figure out how to manage it or what the consequences are. >> it would be helpful to us as the people that pass continuing resolutions to have that highlighted in your audit report so that we know that continuing resolutions have tangible negative results, not just to the operations but to the expenditure of money for the entire pentagon and each of the constituent services. i might add that during another part of my life, i was asked to take over the alabama tenure college system at a time in which there were two criminal investigations going on. in the birmingham news when they were reporting on corruption. we used both the internal audit function and the external audit

function not just to remedy what happened but to change the culture within the alabama college system. do you believe that there will be some change in the culture of the pentagon as a result of these audits? >> absolutely. that's the point. >> good. can you elaborate a little bit about how that would manifest itself? >> i think what you'd find is there are folks who are doing their mission. one of their missions is to make sure information is updated for others to use. when their time is tight, that step gets skipped and they do the others. then others who rely on that information have to redo it themselves or function with incomplete information, knowing that's going to be audited and somebody is going to point out that difference creates an incentive to complete that and get those items done. it should reduce the amount of phone calls the person gets to answer the question because somebody can rely on the system now. that type of culture change is important in an organization that has such a spread of

functions and has to rely on those type of data sets. to be able to make decisions. >> i just want to say the doctor and i were just talking, this may be one of the most important things that we accomplish during our terms here in congress. so i think you will see a lot of support for your activities here on this committee and throughout the congress. i appreciate what you're doing with that. with that, mr. chairman, i yield back. >> thank you for your support. i appreciate it. >> thank you, mr. chairman. i'm very excited about the work that you're doing. it's a mammoth really big task you have ahead of you. i'm trained as a cpa and an attorney and i was the mayor of a small city and county executive of a large county that didn't have proper inventory or procedures in place. i went through this on a much smaller scale. when i first came to congress, i would hear my colleagues asking about different weapons systems and pieces of equipment. and i didn't know what we owned and i tried to get my staff to

figure out what we owned by working together with the d.o.d. and other people. it was very hard to get the limited information we got. 14,500 aircraft in the u.s. military, for example. how many ships do we have, how many armored vehicles. will we have a comprehensive inventory at the end of this process? that tells us what we own? >> this is the important way of how we implement the audit. it is possible to have that without making it easily accessible. my concern is you miss some of the benefit of the audit. one of the changes is not only to have the accurate count but to have it easily searchable, in other words in a data set where somebody can run the report and say here's what you have, here's where they are and here's why they're not working or working. so the idea is, we'll have the count. what we want to do is be more like a business, which is go beyond the mere standards of

the audit to use that to drive intelligence so the leadership will have timely and accurate information not just about the dollars but about the facilities and equipment and military supplies behind those dollars. >> each piece of equipment will be rated as far as its condition? >> i don't know if it deals with impaired or not impaired, but we'll have those. the audit doesn't worry about small items, but the larger end ideas would certainly be things we should be able to have timely and accurate reporting on. >> what percentage of the overall audit is going to be devoted to inventory as opposed to procedure and process and financial statements? >> as you walk through, they will do inventory. they will do property. they will also do pay and personnel, those type of things. over time that may be more labor intensive. it's one of many items. >> is it a half the task, a quarter of the task? >> i'm guessing about a quarter

of the labor hours will be spent. >> there will be a physical visiting of the sites to actually identify the pieces by the auditors, or will that be done by the people who work for the d.o.d.? >> by the auditors. they'll do it two ways, book to floor and floor to book. they'll look at your record and see what you have in inventory and look at the inventory to see that's what your records say. that way they're checking it both directions to make sure they both align. >> this is a very exciting task. do you think that the audit of the inventory of equipment, of properties, of buildings, will be conducted by the end of the calendar year of 2018 or some time off into the future? >> they will go through the audit the spring and summer. they will publish their reports starting about november 15th. this being a first year audit may take a little extra time. they'll do this every year. they'll do a sample. so they may pick certain pieces of equipment the first year and

a different set the next year. but the findings they have on one are often the same for the others. as soon as we see them it gives them a clear idea -- >> so there's only going to be a sample inventory of what we own? >> it's statistical sampling to be able to have evidence of confidence in it so they will be on site counting things and checking numbers. >> i don't know if it will tell you exactly what they counted but it will tell us the sample sizes, yes. >> thank you very much. i yield back. >> mr. kelley. >> thank you for being here. i again want to echo a thank you to chairman conaway for his efforts in getting this to come. it's a massive undertaking. long overdue. it's going to be very, very difficult. i hope we will focus on the

things that improve the processes going forward. some of those, number one is oco. there's a lot of room even when people are trying to do that right, for abuses that are intentional and unintentional. i'm more concerned about the unintentional. what people just don't know. how far back are you going to the start of the audit as far as those things? >> when you look at dollars in fy 18 they will be auditing money received in fiscal year 18. when you look at assets acquired, it doesn't matter when the asset was acquired. they will look for existence and completeness of those assets. >> very good. just from having served quite a long time, i think some of the -- i understand the process of at the end of the year spend all the money or you lose it. that needs to be a recommendation that you don't lose it so we can spend that money wisely, maybe not in operations or maintenance, but in acquisitions it's important

to be able to carry that money forward as long as it's earmarked or allocated to a source even though it's not spent yet rather than having to rush and spend it on things you don't need. you don't need to buy pens to stack up for people to pilfer. those things add up. and i guess my final point is i'm sure you'll look at things like when we turn in equipment and those kind of things and the write offs and how you do that and also tool dropages, those things that you come back from a field exercise in the guard and you do all these tool droppages to make sure you get your equipment back. you will be looking at processes like that and holding people accountable or service members as opposed to say okay, it's in the dollars. is that correct? >> it will hold people accountable. we'll look at disposable

equipment. did you properly dispose of it, did you record it? and we'll start to clearly see did you get paid for the disposal. some of this equipment we do get money for when we dis pose of it. >> the gao indicates that the d.o.d. lacks a sufficient number of financial managers. what are you doing or what areas has the department done to take care of or to acquire these? >> this is a challenge. when you have an organization that most of it has never been under audit and federal employees don't themselves conduct financial statement audits the way commercial enterprises do. you may have cpas that don't have exposure to those practices. and so over time we've been able to grow that a couple of ways. the first is the agencies that went under audit first like the corps of engineer. it had a number of people who

have now been through an audit a number of times, helping them fix things. some of them we've grown by leading with certain examples. some we've just done out and hired. the third focus is training. we have a robust training program where we've been emphasizing audit readiness and internal controls, whereas a decade or two ago it would have been budget type topics and not accounting topics. because that was almost exclusive focus on a lot of the financial management community. >> mr. chairman, i have no more questions. i yield back my time. >> mr. norquist, i want to interject on one point mr. kelley raised. i am also very concerned that we are going to be so late in the fiscal year with a final appropriation and the needs are so great that there's going to be inevitable problems as a result. i'm thinking about the audit. you're going to find things and there may not be enough time to fix the things you find by the

time the money is -- so i think my staff has reached out to yours to work together to see about some greater flexibility in spending money after the end of the fiscal year. i think about our maintenance problems. they're enormous. and we don't want to waste money but we also have got to get our ships and planes fixed. >> absolutely. >> so i think this is an area -- and there's a lot of concern in congress about accountability for the money. i understand that, but i think this is an area where a number of us in congress working with you in the department can have a better -- especially this year, because we are going to be so late. so i just want to mention that because y'all were discussing it even though it's a little different from the topic here. >> mr. norquist thank you very much for being here, taking the time.

your testimony. but also thank you for helping us do our job and giving the people providing them with accountability to the american taxpayer. i appreciate that. obviously you have a tremendous amount of experience in doing what you're doing, 28 years. you actually were the cfo that audited dhs. in the sixth months that you've been in this position, what has been the biggest lesson you've learned so far? and do you see foresee any other potential delays besides the worrying about budget stability and funding, as you mentioned in your last paragraph of your statement? is there any other delays you foresee that will prevent you from doing your job? >> the thing that surprised me the most was how many people who have been working this issue

were eager for it to finally start. i have to tell you for an accountant to be told to put together all those controls and all this stuff and then say we're not doing the audit this year and then do it again and then each year they repeat that, you start to get to wondering if it's ever going to happen. so this sense of it's happening this year and everything you've done up until now matters, the reaction i would get in rooms from folks working on this was really reenergizing. excellent. there's been a lot of folks wondering if they've been working in vain. everything you did to get read y will matter and pay off. i think that was a pleasant surprise on moving forward. i think the biggest concern in the long run is going to be the systems, because they take the longest to fix. policies, procedures, even cultural changes we can do more quickly, but some of the system interfaces may take some more time. one of the things i'd encourage the committee, as you go through

each year's budget review, when somebody comes in and asks for money for a business system, make sure you understand is it compliant, have they prioritized the things related to the audit, or have they sort of pushed those down on their to-do list in place of something else. i don't want to say they don't get much attention, because i know they spend time on this. they're not sexy or glamorous, but making sure that the funding for those and the things that are being done, the systems phased out, those are the ones that will take us some time. but i think they have some tremendous long-term improvements for the department. >> great. once again, thank you and good luck. >> thank you, sir. >> i yield back. >> thank you mr. chairman. thank you for having this hearing. i apologize, i'm probably going to be covering ground you already covered. i was in another committee where we had a markup and i just got here now. from the 30,000 foot level, i really like that the audit will result in more accountability

and more transparency, but other thing that i think will be accomplished is real important and i'd like to get your thoughts and that is reform, uncovering where maybe we don't have the best practices in place, where there might be waste or duplication. can you reassure not just the members of this committee, but by extension the rest of our colleagues in congress and the american taxpayers that you think this audit will uncover where we're not spending money in the best way possible so we can either lower the budget, accomplish the same thing, or invest in more lethal capability for the d.o.d. >> i think it's very essential in this contribution to reform. i'm very excited about the possibility and how it's going to enforce reform. deputy shanahan set up organizations within the department that are working

on this issue. i support them through the audit by making sure they have the business data they need to make those reform decisions. as you look across organizations and you're comparing what do we pay in electrical rates across all of our different facilities, why. what are the highest ones? why are they paying higher rates? what's the difference? what are the lower. so instead of someone saying everyone cut your number by 10%, we focus on those places where the costs seem out of line with the rest of the enterprise. that type of financial data, the accuracy of that, being able to pull it from multiple systems and have confidence in it is what the audit gives you and it's an enabler to reform. i'm sure we'll find within the financial processes by removing places where we have to rework data because the accuracy will allow it to go faster. i'm more excited in the long run about what it allows the department to do to function like a business. >> thank you. i know that chairman and my

colleague on my left here and many others have really been pushing for greater effectiveness and efficiency in how the dollars are spent. we have that trust to the american taxpayer. so will the outcome be not just that we find hopefully these efficiencies, but it's done in a way that the american people know that we're finding these and the entire congress knows that we're finding these efficiencies. >> yes. we will make sure the financial statement is public. so what the auditors find and announce is closed will be closed, but i will let the committees know here's how their reforms change things and how they work differently. some of the working capital funds, they bill. thoz a those are set up to a business type function. >> thank you for that.

i really appreciate it. the military of our country is held in the highest esteem by the american people. the only criticism that i'll sometimes hear is are we spending the dollars the most effective way and people are concerned about that. so thank you so much for what you're doing. mr. chairman, i yield back. >> thank you, mr. chairman. i wanted to specifically ask you about some of the issues that the outside auditors had that were brought in. someone had asked a question a little bit earlier, but one of the reports that i read said they were having some challenges being able to make final conclusions. can you talk about some of the issues that the outside auditors that were brought in had? >> is there a particular one you're thinking about? or you just want me to walk through the challenges they face in general? >> just in general. >> the first challenge an auditor faces in general, government and commercial, they're required to be independent, which means the people showing up didn't used to work for you. so they've got to understand

your business processes. we've put together guides that welcome them and say here's how we're structured, here's what we do. when we spend money the document looks like this so they can start to recognize that they know what they're testing for the adequacy of. we've been doing security clearances because a lot require security clearances to be able to do their work and get them through. a number of them are out doing site visits to understand what's going on at the different places. the air force auditor is at tinker air force base this week. the naval auditors visit jacksonville in the fall. to see what the praegz operations like like. there's an orientation that they go through before they plan the audit to make sure their audit is consistent. then there's security clearances we've been getting them through so they can start in a timely manner. those are all some of the key pieces. there will be a challenge on the volume. this isn't just a large audit for us. it's a large audit for them.

they've all scaled up for that challenge. >> what about training and sustaining a work force to be able to work specifically on financial management and what have you within d.o.d.? what are some challenges around that? i would think that just being able to have a full-time staff work solely on this, because this is obviously a big issue, must be a challenge in and of itself. >> it is. we've had to realign folks internally to be able to provide the time and attention on this to support them. these are some of the functions that over time when people took cuts, they said i can reduce this. some of those functions are being restored. we're doing internal tradeoffs on that. we're basically operating underneath the reduction accounts that the legislation put in place. but those are realigning forces within it. i will tell you that over time what i will likely come back to you with is shifting some of the work where we hired an outside firm as a consultant to something run by a federal

employee by trading off contracting dollars for federal employee dollars because we're going to need those capabilities in house. we may change the balance of that over time as we realize this function is going to stay and federal employees are able to do that on a sustained basis. still, there's always a use for skilled experts on the outside on particular topics, but you want to change that dependency over time. >> thank you. mr. chairman, i yield back. >> mr. conaway. >> thank you. two other things real quick. the department is constantly facing funding challenges, et cetera. do you think you've got the right position or strength of position to be able to maintain and protect the funding to get all of this done? because it's going to be setting priorities and trading these dl dollars that are going to be needed over time versus spending them somewhere else.

do you think you have the right support from the secretary and others to be able to make a argument that you need these funds to continue the audits and continue the fixes? >> i have the support of the secretary and the deputy secretary. i will tell you at the president's budget level or at the committee level, i'm very comfortable. if you start talking about a cr that runs through the year, we're in a very different place. i'll fight to protect this, but we have readiness issues in others that i'd have to be paying attention to as well. >> the bca levels would be a disaster? >> that would be a disaster. >> on the database of findings, there will be some findings that are more important than others. >> mm-hm. >> so when it first comes out, just the scope of the number of findings will probably be startling. will the cpa firms grade those findings as to ones that are, for lack of a better phrase, really critical or systemic versus easily fixed? and should go away shortly?

will there be some sort of grade to help bifurcate it into places so we can better know the sheer number? >> they will score it and weight it in terms that relate to its size compared to the financial statement. that's not necessarily its importance to the department in terms of fixing. they may decide there's a vulnerability that has really very little dollar value that we think is a security issue that makes it one of the first things we fix. we may see a change where the savings are there and we want to do that fix first. we will have their scores in terms of how they categorize it. but we'll need to prioritize within the department which of these reforms are most important to get done to support the chief management officer, to save the taxpayer money. even evaluation of old military equipment, if we don't think that's data the people are going to use right away, we may wait on some of those reforms to prioritize the others. >> on the responsibility to fix,

it will come with a time frame that's rational and expected? >> generally i'd expect the time frame to come from the corrective action plan. we'll check is this a reasonable time frame. but some of these will take some period of time, but you can see the reduction in the conditions within it that will show you they're making progress. >> thank you. >> thank you for your testimony and for the work that you are doing. i think it's vitally important for the department and the taxpayer. to make sure we're spending dollars the way they should be spent and we're getting the most for them. this auditing function is something i've had a longstanding interest in. years ago serving on the intelligence committee and we had somebody from d.o.d. and i asked the question, you know, what about auditing functions to make sure that we're spending dollars wisely. it was then i became aware that we don't do the auditing function. so long overdue. i'm glad we're finally getting

to this point. many of the questions i had have for the most part been addressed, but i just wanted to delve a little deeper. while conducting an audit of this magnitude, i guess i want to know how you plan to deal with the significant complexities that it may present dealing with for example old contracts or contracts of systems not designed with an audit in mind or auditing in particular the classified portion of the budget. this is a particular area of interest that i would have. by design, there's not much transparency into black projects and programs for security reasons. how do you deal with those issues? and does guidance for new contracts provide for the eventuality of an audit?

>> there are a couple pieces. the first one you bring up is in contracts. there are some issues that we need the contractor to give us their invoices set up a certain way. so we can see the pieces that are included. older contracts don't have that. so you look at which ones do you modify, which ones do you build on and are there some places where you do an alternate way of valuing that equipment. there's different methodologies you can do. you try to decide from the accuracy and the taxpayer point of view, what's the best use of taxpayer money. some equipment, if you think it's going to go out of inventory, you might decide i'm not going to spend a lot of energy on it. it won't be here anymore. it's not a highest priority. with regard to systems, i think you look at each and ask the question, can i fix it to do what we need it to do through a software patch or upgrade. can i replace it by moving its work to something else, or do i have to

work around it in some sort of manual form and that is eventually retired. each of those services, each of the organizations is going through that. defense, dai is a name of an accounting system that has been implemented across 20 defense wide organizations. in that case the answer was just turn them off. we're going across the defense wide entities and turning off and replacing those. in the services, there's a lot more of consolidating. they're going from several accounting systems down to fewer that are compliant and support an opinion. with regard to the classified, i may need to talk to you offline about how we handle it. let me assure you a couple things. classified programs are included in the audit. we have cleared auditors and others who can do this. as you mentioned from the intelligence community, they all receive stand alone opinions, so they actually have been under audit for three years now. i've been getting an update on how they've been progressing. those are published in a

classified form and members of congress are entitled to look at those. >> for the classified programs going forward, will those you will be in-house auditors and not outside contractors? >> can i address all of those in a different format. at a certain point i'm going to run into classification concerns. let me assure you they're included and we can talk about the mechanics of it in a different way. >> sure. i'd like to do that. thank you very much for the work you're doing. i yield back. >> thank you, mr. chairman and mr. norquist for being here. it's my understanding that the army, navy, defense health programs, defense logistics agency, u.s. special operations command and transportation command still have not received a clean audit opinion from the d.o.d. a.i.g. can you talk about how you approach auditing these divisions of d.o.d. over the course of fy 18 in doing the odd

tet process? >> there are some that have and then there's a series that haven't. some of those were under audit in this previous year in 17. as was -- the u-- some of them have a year of experience. the army, navy and air force are splitting their audits into two parts. they have a section of the army funded through general funds, meaning appropriations and another from a working capital fund. it bills for its services so it looks more like a company. they each have different accounting systems. while the same auditor does both, they've split it into two parts because the way they function is different. that will also allow us to see the progress within each of those organizations. that split occurs in the army, navy and air force. the other ones, most of them get stand alones. if they're too small, they'll be covered by the i.g. they'll all be rolled together

by the i.g. to give an opinion on the department as a whole. >> thank you, mr. chairman. i yield back. >> mr. norquist, you referenced this earlier, but i want to ask again. in these efforts, do you have the support of the secretary of defense and the deputy secretary? what you've talked about is cultural change, it is prioritizing dollars. it involves a number of things that if they're not supported by the top leadership, they're not going to happen. >> absolutely. the tone from the top is excellent. >> the first conversation i had with the secretary after he was nominated to be secretary, he brought this up on his own. so my experience with him is that he believes this is very important. i just think you've got to have that support from him to make this successful, i think. >> i just want to brag on the chairman for having the very

first hearing of calendar '18 on this issue and highlight that. i appreciate your keen continued support for getting this done. that tone from the top is much appreciated. i yield back. >> i appreciate it. as i said at the beginning, this has been a bipartisan priority for years. we're going to stand there right with you to make sure that it actually occurs. >> thank you, mr. chairman. >> with that, the hearing is adjourned. [ inaudible conversations ]

[ inaudible conversations ]

you're talking about the cr. my question was focused on the end of the year, september 30th. and is there a responsible way to allow them more flexibility to spend fy '18 money on october 2nd. >> you talked specific to the operations because that's the time that expires at the end of the year? >> well, yes, because as you

know, procurement -- all these forms of dollars have different time periods under which they can be spent. but i'm very conscious of the maintenance problems that have -- we've talked about for the last two years. and so we've got dire needs to fix our ships and planes and equipment and i want to make sure we do that and we do it smartly. >> aren't you concerned about the training aspect of it? >> of course, absolutely. >> you have to book ahead. >> yes, ma'am, you're exactly right. if you'll remember, the department has reported to us that after three months of a cr, there is training that can never be recovered because those demands keep rolling and you can never catch up. i am concerned. that's another obvious use of the operation and maintenance funding is the training as well as maintenance of equipment and so forth. that's part of the reason i

highlighted it. you use that. it's not exactly the topic of this hearing, but it is the topic of making good use of taxpayer dollars. >> what about the cost associated with this audit process? $367 million just to do the audit and then $551 million to make the fixes. did you anticipate these costs? is it surprising? do you see any issues paying for it? >> well, i did not know how much it costs, but i thought he helped me understand better what we're really talking about. if you have things that need to be fixed, they need to be fixed. hiding your head in the sand is not a good answer. if you have, for example, business account systems, they don't talk to each other. that's part of what has gotten us into this problem that we're in. we've got to fix those things and particularly at the beginning it will be expensive. but i am firmly of the view that

it will pay off for the taxpayers and for the war fighters over time. the other one point, i forget who made it, somebody said if we're trying to do acquisition reform and other things, you've got to have data. you're got to know what you're doing in order to fix it. last year we really wanted to focus on what we contract for services. what we found out was that there's a lot of information we don't have about we are contracting for services. what we had to do last year was put in requirements for data and greater transparency. the audit helps all of that. >> to clarify, when you're talking about end of the year, you're talking cr into spring or february, then there's a big boost and d.o.d. has to spend this off in a very short amount of time. >> sure. just as he said. they're operating under a cr through much of the year. all of a sudden you've got six months or whatever's left to

spend the rest of the money and i'm concerned that the needs are so great i don't want that money to either not be spent or to be spent foolishly. >> is it possible, then, that in a budget deal you could go below that 700? because at this point you've done half the year on a cr at next year's levels. >> like in answer to this question, the problems do not go away because we hit september 30th. the maintenance problems, the readiness, the training problems, other readiness problems are there and we need to fix them. that's the priority. the men and women are out there risking their lives for us deserve that. >> on the readiness issue, this is not new. you've been talking about this for a while. do you feel like you're making head way with your colleagues in terms of them understanding what that means? >> yes, they are. but frankly what's really made hey way with our colleagues is

the deaths of sailors, the deaths of marines, soldiers, et cetera. none of us can ignore the accidents and unfortunately the kaz casualties that have come from those accidents. the other thing that made head way is the north korean missile launches and all the things that have happened in the world. they know and i think they have a better appreciation for the fact that we can't afford to wait and assume we're going to fix things later. the world demand its now. >> do you feel like d.o.d. is focusing enough on that message right now? i know they've got a couple different -- >> d.o.d. is certainly focused on the problem. as we've talked before, some of the folks in d.o.d. are reluctant to talk openly about our shortfalls because you're broadcasting that to your potential adversaries.

and i admit it's a fine balance. but if we're going to convince my colleagues who are not on this committee as well as the american people that -- to fix these things, i think we do have to at least talk somewhat openly about what our problems are. >> have you seen either drafts of the nuclear missile review and what's your feeling on how those are shaping snup? >> well, i look forward to seeing them when they're released soon and i'm hopeful that maybe we'll have a hearing to go through those results. and then we'll all be able to talk about it. >> have you seen the draft yet? >> i don't talk about what i've seen and what i haven't. y'all have a good day. >> thank you.

two house lead oeers on csp. speaker ryan talks about tax reform and represent hoyer about the possibility of retaking the house in 2018. >> work arounds to get beyond the $10,000 reduction. >> i don't think it will hurt anyway. the big idea they're talking about is let million airs and

billionaires pay their tacks xe donations. i can't imagine the irs and treasury will let that help. >> i expect us to retake the house, the majority. d i do so because i think the environment is such that the american people are looking for some stability. they're looking for focus on the issues they care about in terms of jobs, in terms of education, in terms of health care, in terms of the environment. and in terms of our national security. i think they view democrats as being able to provide some stability to our country and very frankly also to a proper check and balance in our system when we see a president who has trouble creating stability within the white house, much less within our government. >> watch cspan's interview with

speaker paul ryan today at 6:45 p.m. eastern. and steny hoyer stand at 10:00 a.m. eastern. president trump gives his first state of the union address on tuesday, january 30th. cspan's coverage begins at 8:00 p.m. eastern with a preview of the address followed by the president's speech at 9:00 p.m. after the speech, we'll take your calls and also get reaction from members of congress. the state of the union live on cspan, cspan.org and the cspan radio app on tuesday, january 30th. the house financial services subcommittee on monetary policy and trade recently held a hearing on foreign investment in the united states. the subcommittee heard from former officials from the defense, treasury and commerce