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Section 1
management’s Discussion and analysis
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Section 1
a system of identification using visual symbols, became a useful art in the Middle Ages, when warriors on the battlefield displayed an emblem on their shields and the tunics they wore over their armor. In America, heraldry symbols have been used by military forces as well as other organizational elements of the government since the beginning of the Revolution.
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Significance of the DoD Seal
of the United States is a symbol familiar to Americans. In addition, each department and agency of the government has its own seal which appears on documents and publications issued by the organization. The seal of the Department of Defense, shown above, was designed to visually depict the mission of the Department.
long associated with symbolism representing the United States of America and its military establishment, is an emblem of strength. In facing to the right, the field of honor is indicated. The eagle is defending the United States, represented by the shield of thirteen pieces. The thirteen pieces are joined together by the blue chief, representing the Congress. The rays and stars above the eagle signify glory, while the three arrows are collectively symbolic of the three component parts of the Department of Defense (Army, Navy, and Air Force). The laurel stands for honors received in combat defending the peace represented by the olive branch.
Heraldry,
The Great Seal
The American bald eagle,
�Department of Defense Agency Financial Report 2007Section 1: Management’s Discussion and Analysis
Section 1: Management’s Discussion and Analysis
TheDepartmentofDefensehaschosentoproduceanalternativetotheconsolidatedPerformanceandAccountabilityReportcalledtheAgencyFinancialReport(AFR).TheDepartmentdecidedtoparticipateintheFY2007pilotpursuanttoOfficeofManagementandBudget(OMB)CircularA-136,“FinancialReportingRequirements.”WewillincludeourFY2007AnnualPerformanceReportandFY2009AnnualPerformancePlanwiththeFY2009CongressionalBudgetJustification(CBJ)thatwillbesubmittedtotheCongressandOMBinFebruary2008.Asasupplementtothisreport,wewillissuea“Highlights”documenttobepublishedonourwebsite.TheHighlightsdocumentwillcontainbudget,performance,andfinancialinformationinabrief,user-friendlyformat.
Links to the Department’s Performance and Financial Documents
“Highlights FY 2007” summary of financial and performance information will be available February 2008, at http://www.defenselink.mil/comptroller/afr
FY 2009 Congressional Budget Justification (including the Annual Performance Report for FY 2007 and Annual Performance Plan for FY 2009) will be available February 2008, at http://www.defenselink.mil/comptroller/defbudget/FY2009/
UsingthisapproachtheDepartmentprojectsseveralsignificantimprovements:• Enhancedreadabilitybyreducingthelengthofthe
report.• Reducedduplicativeinformationinthecontentofthis
report.
• ImprovedperformanceinformationbysubmittingitwithourFY2009CBJsubmissiontoCongressandOMB.Theperformanceinformationwillbebaseduponafullyearofactualdatainsteadofestimatingfourthquarteraswehaveinthepreviousyears.
• Enhancedtransparencyusingwebsitelinks.• Reducedproductioncosts.
Tofurtherstreamlineandconsolidateitsreports,theDepartmentwillusewebsitelinksandreferencestoprovidesomeoftheperformanceandfinancialinformationassociatedwithagencymissions,functions,andstrategicplans.
Mission and Organizational Structure
ThemissionoftheUnitedStatesArmedForcesistoprovidethemilitaryforcesneededtodeterwarandtoprotectthesecurityofourcountry.SincethecreationofAmerica’sfirstarmyin1775,theDepartmenthasevolvedtobecomeaglobalpresencewithindividualsstationedinmorethan140countriesdedicatedtodefendingtheUnitedStatesanditsinterestsaroundtheworld.TheDepartmentembracesthecorevaluesofleadership,professionalism,andtechnicalknowledge.Itsemployeesarededicatedtoduty,integrity,ethics,honor,courageandcommitment.
ThechartbelowshowshowtheDepartmentisstructured.
Secretary of Defense
Deputy Secretary of Defense
Department of the Army
Secretary of the Army
UNDERSECRETARIES
ANDASST. SECRETARIES
OF THE ARMY
CHIEF OF STAFF, ARMY
Army MajorCommands & Agencies
Navy MajorCommands & Agencies
Marine Corps MajorCommands & Agencies
Air Force MajorCommands & Agencies
Department of the Air Force
Secretary of the Air Force
UNDERSECRETARIES
ANDASST. SECRETARIESOF THE AIR FORCE
CHIEF OF STAFF, AIR FORCE
Joint Chiefs of Staff (JCS)
Chairman JCS
The Joint Staff
VICE CHAIRMAN JCSCHIEF OF STAFF, ARMY
CHIEF OF NAVAL OPERATIONSCHIEF OF STAFF, AIR FORCE
COMMANDANT, MARINE CORPS
Combatant Commands
- CENTRAL COMMAND- EUROPEAN COMMAND- JOINT FORCES COMMAND- NORTHERN COMMAND- PACIFIC COMMAND- SOUTHERN COMMAND- SPECIAL OPERATIONS COMMAND- STRATEGIC COMMAND- TRANSPORTATION COMMAND
Defense AgenciesDoD Field Activities
Office of theSecretary of Defense Inspector
General
UNDER SECRETARIES,ASSISTANT SECRETARIES OF DEFENSE
AND EQUIVALENTS
Department of the Navy
Secretary of the Navy
UNDERSECRETARIES
ANDASST. SECRETARIES
OF THE NAVY
CHIEF OF NAVAL OPERATIONS
COMMANDANTOF THE
MARINE CORPS
� Department of Defense Agency Financial Report 2007 Section 1: Management’s Discussion and Analysis
The Secretary and the Office of the Secretary
TheSecretaryofDefenseandtheOfficeoftheSecretaryofDefenseareresponsiblefortheformulationandoversightofdefensestrategyandpolicy.TheOfficeoftheSecretaryofDefensesupportstheSecretaryinpolicydevelopment,strategyformulation,planning,resourcemanagement,andfiscalandprogramevaluation.
Military Departments
TheMilitaryDepartmentsconsistoftheArmy,Navy(ofwhichtheMarineCorpsisacomponent),andtheAirForce.Inwartime,theU.S.CoastGuardbecomesaspecialcomponentoftheNavy;otherwise,itispartoftheDepartmentofHomelandSecurity.TheMilitaryDepartmentsorganize,staff,train,equip,andsustainAmerica’smilitaryforces.WhenthePresidentandSecretaryofDefensedeterminethatmilitaryactionisrequired,thesetrainedandreadyforcesareassignedtoaCombatantCommanderresponsibleforconductingmilitaryoperations.
PersonnelintheMilitaryDepartmentsareassignedtoActiveDuty,Reserve,andNationalGuardforces.ActiveDutyforcesarefull-timemilitaryservicemembers.ReserveforcesandNationalGuardforces,whenorderedtoactiveduty,augmentactiveforces.ReserveandNationalGuardforcesareanextensionofActiveDutyforces.TheNationalGuardhasauniquedualmissionwithbothfederalandstateresponsibilities.InpeacetimetheGuardiscommandedbythegovernorofeachrespectivestateorterritory.Underapplicablestatelaws,theirauthorityincludestheabilitytocalltheGuardintoactionduringlocalorstatewideemergencies,suchasstorms,drought,orcivildisturbances.Whenorderedtoactivedutyformobilizationorcalledintofederalserviceforemergencies,unitsoftheGuardareplacedunderoperationalcontroloftheappropriateMilitaryDepartment.GuardandReserveforcesarerecognizedasanindispensableandintegralpartofthenation’sdefensefromtheearliestdaysofaconflict.
Chairman of the Joint Chiefs of Staff
TheChairmanoftheJointChiefsofStaff,whoistheprincipalmilitaryadvisortothePresident,theNationalSecurityCouncil,andtheSecretaryofDefense,assiststhePresidentandSecretaryinprovidingforthestrategicdirectionoftheArmedForces,includingoperationsconductedbytheCommandersoftheCombatantCommands.Aspartofthisresponsibility,theChairmanalsoassistsinthepreparationofstrategicplansandhelpstoensurethatplansconformtotheresourcelevelstheSecretaryofDefenseprojectswillbeavailable.
Combatant Commands
ThenineCombatantCommandshaveresponsibilityformissionsaroundtheworld.Forexample,U.S.CentralCommandisprimarilyresponsibleforconductingOperationEnduringFreedominAfghanistanandOperationIraqiFreedominIraq.TheArmy,Navy,AirForce,andMarineCorpssupplyforcestotheseCommands.
FiveoftheseCommandshavespecificmissionobjectivesfortheirgeographicareasofresponsibility,asshowninthemapbelow:
• U.S.EuropeanCommand(USEUCOM)isresponsibleforactivitiesinEurope,Greenland,Russia,andmostofAfrica.
• U.S.CentralCommand(USCENTCOM)isresponsiblefortheMiddleEast,easternAfrica,andseveraloftheformerSovietrepublics.
• U.S.PacificCommand(USPACOM)isresponsibleforNortheast,SouthandSoutheastAsia,aswellasOceania.
• U.S.SouthernCommand(USSOUTHCOM)isresponsibleforCentralandSouthAmerica,andtheCaribbean.
• U.S.NorthernCommand(USNORTHCOM)isresponsibleforNorthAmericaincludingCanadaandMexico.
Thisstructureundergoesperiodicreviews.In2007thePresidentorderedtheestablishmentoftheU.S.AfricaCommand,drawingterritoryfromUSEUCOMandUSCENTCOM.Theheadquarterswillbefunctionalinthecomingyear.
TheremainingfourCommandshaveworldwidemissionresponsibilities,eachfocusedonaparticularfunction:
• U.S.StrategicCommandisresponsibleforprovidingglobaldeterrencecapabilitiesandsynchronizingtheDepartment’seffortstocombatweaponsofmassdestruction.
PACOM
EUCOM
SOUTHCOM
NORTHCOM
PACOM
EUCOM
CENTCOMCENTCOM
SOUTHCOM
NORTHCOM
5Department of Defense Agency Financial Report 2007Section 1: Management’s Discussion and Analysis
• U.S.SpecialOperationsCommandisresponsibleforleading,planning,synchronizingand,asdirected,executingglobaloperationsagainstterroristnetworks.
• U.S.TransportationCommandisresponsibleformovingmilitaryequipment,supplies,andpersonnelaroundtheworldinsupportofoperations.
• U.S.JointForcesCommandisresponsiblefordevelopingfutureconceptsforjointwarfightingandtraining.
Defense Agencies and Defense Field Activities
TheseorganizationsprovidesupportDepartment-wide.DefenseAgenciesprovideavarietyofsupportservicescommonlyusedthroughouttheDepartment.Forexample,theDefenseFinanceandAccountingService(DFAS)providesaccountingservices,contractorandvendorpayments,andpayrollservices.DefenseFieldActivitiesperformmissionsmorelimitedinscope,suchastheAmericanForcesInformationServicethatservesasthefocalpointforallArmedForcesinformationprograms.Resources
NearlyhalfoftheDepartment’sworkforcearemenandwomenonActiveDuty.ToprovideAmericanswiththehighestlevelofnationalsecurity,theDepartmentemploysmorethan1.4millionmenandwomenonActiveDuty,approximately828,000intheReserveandNationalGuard,andabout729,000thousandcivilians.Thechartbelowshowstheemployeebreakdown.
*The percentages reflect data as of September 30, 2007, subject to rounding differences.
TheDepartment’sworldwideinfrastructureincludesnearly580,000facilities(buildings,structures,andutilities)locatedatmorethan5,300sitesaroundtheworld,andmorethan32millionacres.ToprotectthesecurityoftheUnitedStates,theDepartmentusesapproximately250,000vehicles,11,000aircraft,and500vessels.
Analysis of Financial Statements
TheAgencyFinancialReportaffordstheDepartmentanopportunitytoprovideits“investors”(e.g.,stakeholders,oversight,andtheAmericanpeople)withcriticalinformationtoassesscurrentfinancialperformanceaswellasitsfutureoutlook.Thoughnotacommercialentity,theDoDhasnumerousstakeholderswithinterestssimilartothoseofpubliccompanies.
Forexternalreportingpurposes,theDepartmentreportsitsfinancialinformationinfourprincipalfinancialstatements,includingaconsolidatedBalanceSheetalongwithstatementsofNetCost;ChangesinNetPosition,andBudgetaryResources.ThesestatementsreflecttheDepartment’sfinancialpositionandchangesinbothproprietaryandbudgetaryactivities.Comparatively,thestatementsaresimilartoacorporateBalanceSheet,IncomeStatement,Stockholders’Equity,andStatementofCashFlow.ThenumberofprincipalfinancialstatementshasbeenreducedfromsixinthepreviousyeartofourthisyearbypresentingtheirinformationintheNotestothefinancialstatements(seeNotes21and22).
TheDepartment’sfinancialmanagementenvironmentiscomplexanddiverse.Comparatively,theDepartment’sassetsexceedthecombinedassetsofthetopsixFortune500companies,whilegrosscostsexceedonlythoseofthetoptwo.Currentassetsexceedcurrentliabilities.Alternatively,long-termliabilitiesexceedlong-termassets.However,83%ofthelong-termliabilitiesarecoveredbyexistingassetsorwillbefundedwithresourcesoutsideofnormalDoDappropriations.
Structurally,theDepartmentconsistsof33reportingentities.TheDepartmentsubmitsnineseparatefinancialstatementstoOMB.TheseincludetheDepartment-widefinancialstatements,theMilitaryRetirementFund,theU.S.ArmyCorpsofEngineers,andthegeneralfundsandworkingcapitalfundsfortheArmy,AirForce,andNavy.Overall,theDepartmentreceivedadisclaimerofopinionfromitsauditorsforFY2007,andtheauditorshavedeterminedinformationinthefinancialstatementsmaynotbereliable.
Todate,fourofthe33reportingentitieswithintheDepartmentareprojectedtoachieveunqualifiedauditopinionsinFY2007:theDefenseFinanceandAccountingService,theDefenseContractAuditAgency,theDefenseCommissaryAgency,andtheOfficeoftheInspectorGeneral.AttheDepartment-widelevel,theDepartmentreceivedfavorablereviewsforthefourthconsecutiveyearontwofinancialstatementlineitemsinFY2007:(1)FederalEmployees’CompensationActLiabilities,and(2)AppropriationsReceived.
National Guard15%
Civilian25%
Reserve12%
Active Duty48%
Staffing for FY 2007*
� Department of Defense Agency Financial Report 2007 Section 1: Management’s Discussion and Analysis
Overthepastyear,theDepartmenthasrefinedtheauditapproachfromonethatfocusessolelyonline-itemstoonethatfocuseson“segments.”Thisalignsend-to-endbusinessprocesseswithfinancialmanagementinitiativesthatfocusonimprovingthequality,accuracy,andreliabilityoftheDepartment’sfinancialinformation.Thedepartmenthasnotyetundergonesegmentedaudits.Refertosection1-9foradditionaldetails.
TheDepartment’sfinancialstatementsforFY2007arepresentedintheirentiretyinSection2,FinancialInformation.Asummaryanalysisofthestatementsisprovidedinthefollowingsection.
Financial Analysis
Ingeneral,thefinancialstatementsfortheDepartmentreflectshort-termsolvency.TheDepartment’scurrentassetsexceedcurrentliabilitiesbyapproximately$337.6billionindicatingDoD’sabilitytosatisfyimmediaterequirements.However,long-termliabilitiesexceedlong-termassetsbyapproximately$882.0billionasthefuturecostofmilitaryretirement,health,andotheremployeebenefitssignificantlyinfluencethelong-termfinancialoutlook.
TheDepartment’sunfundedliabilitiesconsistprimarilyofmilitaryretirement,health,andotheremployeebenefits,whichcomprise$1.5trillionofDoD’stotalliabilities.Ofthisamount,$1.2trillionofunfundedactuarialliabilitiesrelatedtoestimatedfutureyearcostsfortheMilitaryRetirementFundandtheMedicare-eligibleRetireeHealthCareFundarecoveredbyappropriationsthatarenotpartoftheDepartment’sbudget.
*The amounts reflect data as of September 30, 2007, subject to rounding differences.
Withtheexceptionofthe“concurrentreceipt”benefitsgrantedtomilitaryretirees,theDepartmentreceivesresourcesforallnormalcostsofretirementandMedicare-eligibleRetireeHealthcarethroughregularappropriations.Approximately$317.3billioninunfundedliabilitiesforretireehealthprogramsremaintobefundedfromtheDepartment’sfutureappropriations.Onceactuarial
liabilitiestobecoveredbyannualappropriationsoutsidetheDepartment’sbudgetarefactoredout,theDepartment’sassetsexceeditsremainingliabilitiesbyapproximately$678.1billion.Thisamountconsistsprimarilyoffixedassetsandinventory,therefore,theyarenotnecessarilyavailabletocoverliabilities.Additionally,significantportionsoftheDepartment’sassetsareearmarkedforspecificpurposes.
DuringFY2007,theDepartmentreceived$658.6billioninappropriationsfromtheCongressandinvestedtheseresourcesinthekeyareasshownonthechartbelow.TheDepartment,theFederalGovernment’ssinglelargestagency,receivesmorethanhalfofthediscretionaryfederalbudget.
*The percentages reflect data as of September 30, 2007, subject to rounding differences.
BymakinginvestmentsinDepartmentalassetssuchaspeople,infrastructure,operationsandtechnologies,DoDcontinuestodefendnationalinterests.ThroughAugust2007,theDepartmentspentapproximately$118.2billionfortheglobalwaronterror.Overthepastyear,$5.6billionwasspentoninfrastructure,$31.2billiononmilitaryequipment,and$102.7billiononmilitarypersonnelcosts.ThecompletepictureoftheDepartment’sfinancialinformationshowsseveraltrendsandinsightsintothefinancialhealthoftheorganization.
• TotalassetsoftheDepartmenthavegrown10%overthepastyear,resultingfromanincreaseinfundsavailable,aswellasinvestmentsforlong-termassetsandmilitaryequipment.
• Liabilitieshaveincreasednearly4%primarilyduetothelong-termliabilityincreasesformilitaryretirementbenefits.
• Costsincreased5%overthepastyearmainlyduetomilitaryretirementbenefitcosts.
Funded Liabilities$411
Unfunded Liabilities$1,640
Unfunded vs. Funded Liabilities*(amounts in billions)
Other2%
Construction1%
Operations &Maintenance
23%
Global War on Terror25%
FY 2007 Resource Allocation*
Research & Development12%
Military Personnel & Benefits17%
Military Retirement Benefits7% Procurement
13%
7Department of Defense Agency Financial Report 2007Section 1: Management’s Discussion and Analysis
Long-Term Liabilities Related to Military Retirement Benefits
TheMilitaryRetirementFundwasestablishedin1984andcertaincostswerecarriedforwardfrompre-existingliabilities.ABoardofActuariesappointedbythePresidentisresponsibleforapprovingactuarialassumptionsforthefundandsettingthepaymentschedule.Historically,interestcostshavemountedbecauseannualpaymentswerelessthantotalcostofinterest.TheBoardhasdeterminedthatarevisedpaymentplanisnecessarytopaythefullcostofinterestandtheunfundedliabilitywhichwillbereducedovertimeassumingnosignificantchangesoccurinbenefits,assumptions,andactuarialexperience.
Military Equipment
TheactualchangeinmilitaryequipmentforFY2007was$9.6billion.Ofthatamount,$8.2billionintrainingequipmentwasreclassifiedtoGeneralProperty,PlantandEquipmentinaccordancewithaDoDpolicychangerefiningthedefinitionofmilitaryequipment.EffectiveFY2007,thedefinitionofmilitaryequipmentspecificallyexcludestrainingequipment.Asaresult,thenetincreaseinmilitaryequipmentwas$1.4billion.
Real Property
Ongoingeffortstoaccuratelyidentifyandreportrealpropertyresultedinanincreaseof$4.9billiontorealpropertyduringFY2007.Ingeneral,theDoDoccupiesmorethan60%ofthetotalpropertythatfederalagenciesownorlease.Managingfederalassetsdiffersfromthemanagementofprivatesectorassets.Primarily,theproceedsfromthesaleoffixedassetsarenotavailableforusebytheagency,butarereturnedtotheDepartmentoftheTreasury.Intheprivatesector,thosesameproceedsaretypicallyusedtosupportorliquidatelong-termdebt.
Summary
Insummary,theDepartmentisimprovingfinancialdecision-makingprocessesandprogressingtowardbetterfinancialmanagement.Greatstrideshavebeenmadetowardimprovingthelong-termfinancialcondition.Theshort-termoutlookistrendinginapositivedirectionasthevalueofcurrentassetsexceedsthatofcurrentofliabilities.Inaddition,equityistrendinginapositivedirectionafternotfactoringactuarialliabilitiestobecoveredfromnon-DoDresources.Whileresourcesarelimitedandtherearevastrequirementsthatgounfundedeachyear,theDepartment’scoremissionsarebeingsatisfiedbyprioritizingandfundingthemostcriticalrequirements.Foritslonger-termoutlook,theDepartmenthasbeenassuredofacontinuingsourceofappropriatedfundstocoverasignificantportionof
long-termobligations,(primarilyrelatedtohealthcareandretirementbenefitcosts).
Financial Improvement and Audit Readiness Plan
TheFinancialImprovementandAuditReadiness(FIAR)PlanistheDepartment’sguideforcomprehensivelyimprovingfinancialmanagementandpreparingforaudit.Asevidencethatprogressisbeingmade,DoDismaintainingagreenscoreforprogressinImprovingFinancialPerformanceunderthePresident’sManagementAgenda.
TheSeptember2007FIARPlanisthefifthsubmissionofthePlantotheCongressandOMB.Theplandemonstratesanincrementalapproachthatbuildsontheaccomplishmentsofpreviousefforts,incorporateslessonslearned,andadaptsasnecessarytosustainandadvanceprogressalreadyachieved.WhiletheU.S.ArmyCorpsofEngineersawaitstheresultsoftheirfirstfinancialstatementauditforFY2006,theyaresimultaneouslyundergoingtheirFY2007audit.TheDefenseLogisticsAgency’scontingentlegalliabilitieshavebeenexaminedandverifiedasauditreadybytheInspectorGeneral,andtheDefenseInformationSystemsAgencyisreadytoassertthatitsBalanceSheetisreadyforaudit.Additionally,severallargebusinessprocesssegmentsareundergoinganindependentexaminationtoconfirmauditreadiness.Theyare:
• TheNavy’snuclearandconventionalshipsenvironmentalliability,and
• TheAirForce’sappropriationsreceived,nettransfers,andfundbalancewithTreasury.
TheDepartment’soverallgoalissustainablefinancialmanagementimprovement.DoDbelievesreceivinganunqualifiedopiniononDoD’sconsolidatedfinancialstatementswilldemonstratethatthegoalhasbeenachieved.WhiletheDepartmentremainscommittedtomakingincrementalimprovements,manyofthesupportingdetailsofthatstrategyhavebeenrefined.TheDepartment’srefinedauditstrategy:
• Limitsauditstoentirefinancialstatementsratherthanauditsonfinancialstatementlines.
• Implementsalternativemethodsofverifyingincrementalprogressorauditreadiness.
• Incorporatesamodeltosustainprogressonceauditreadinessofasegmenthasbeenverified.
• Focusesonthebusinessprocesses,orsegments,thatunderlietheamountsreportedonthefinancialstatementsratherthanexclusivelyonbalancesheetlines.
� Department of Defense Agency Financial Report 2007 Section 1: Management’s Discussion and Analysis
• Recognizesthatfinancialstatementauditability,andthecorrectionofdeficienciesformanybusinessprocesses,mustbetiedtotheimplementationofEnterpriseResourcePlanningsystems.
Therefinedauditreadinessstrategytransitionsitsapproachfromonethatfocusessolelyonaline-itemtoonethatfocusesonsegments.Segmentsareformedbyeitherbringingtogethercloselyrelatedareasoffinancialmanagementorbreakingapartareasintomoremanageableportions.Segmentsmorecloselyalignfinancialimprovementinitiativestoend-to-endbusinessprocesses.TheNavyhasalreadytransitionedtoasegmentapproach,andtheDefenseLogisticsAgencyhasmadesignificantprogresstowardcompletingthetransition.
Toimprovefinancialmanagementandinternalcontrol,theFIARPlanorganizesandintegratestheDepartment’spreviouslyindependentactivitiesandalignsthemwithbusinesssystemsmodernization.IntegrationoftheFIARPlan,theEnterpriseTransitionPlan(ETP),theComponentFinancialImprovementPlans(FIPs),theEnterpriseResourcePlanningdeploymentplans,andsystemmodernizationplanshassetacomprehensivepathforcomplyingwithrequirements,improvingfinancialvisibilityintobusinessprocessesandinformation,andachievingauditreadiness.
Enterprise Transition Plan
TheEnterpriseTransitionPlan(ETP)servesastheDepartment’sroadmapforbusinesstransformationanddescribesitsstrategyforachievingtheDepartment’sEnterpriseandComponentPriorities.OneofthesixBusinessEnterprisePrioritiesdescribedintheETPisfinancialvisibility.Thegoalforfinancialvisibilityismoreefficientandeffectivedecision-makingthroughouttheDepartmentandassistanceinachievingtheDepartment-wideefforttoachievefinancialauditability.Financialvisibilitymeanshavingimmediateaccesstoaccurateandreliablefinancialinformation(planning,programming,budgeting,accounting,andcostinformation)insupportoffinancialaccountabilityandefficientandeffectivedecision-makingthroughouttheDepartmentinsupportofthewarfightersandtheirmissions.TheDepartmenthasestablishedabroadstrategytoaccomplishthegoalsoffinancialvisibility.Thisstrategyreliesonconcurrenteffortsinfourareasthatinvolve:
• DefiningandimplementingtheStandardFinancialInformationStructure(SFIS),acommonlanguagethatprovidesstandarddefinitions,lengths,values,andbusinessrulesthatenabletransparencyandinteroperabilityoffinancialinformationacrosstheDepartment.
• Implementingfinancialsystemsthatcomplywithfederalfinancialmanagementrequirements.The
DefenseAgenciesInitiative,forexample,representstheDepartment’sefforttoextenditssolutionsetforstreamliningfinancialmanagementcapabilities,reducingmaterialweaknesses,improvinginternalcontrols,andachievingfinancialstatementauditabilityto28DefenseAgenciesandFieldActivities.Theobjectiveistoachieveanauditablebusinessenvironmentwithaccurate,timely,andauthoritativefinancialdata.
• ImplementingtheBusinessEnterpriseInformationService(BEIS)toaggregatefinancialinformationandprovideDepartment-widefinancialreporting.TheBEISprovidesservicesforfinancialreporting,cashreportingandreconciliation,generalledger,referencedata,andenterprisebusinessintelligence.TheBEISwillyieldtimely,accurate,andreliablefinancialinformationandenablecomparisonoffinancialdataacrosstheDepartment.ItworkswithotherfinancialmanagementinitiativessuchastheSFIStoprovideinformationformoreinformedfinancialdecision-making.
• Implementingaudit-readyfinancialprocessesandpractices(ThiseffortincludesactivitiestiedtotheFIARPlan).
Limitations of the Financial Statements
TheprincipalfinancialstatementshavebeenpreparedtoreportthefinancialpositionandresultsofoperationsoftheDepartmentofDefense,pursuanttotherequirementsof31U.S.C.3515(b).ThestatementsarepreparedfromaccountingrecordsoftheDepartmentinaccordancewithOMBCircularA-136and,totheextentpossible,generallyacceptedaccountingprinciples.Thestatements,inadditiontothefinancialreports,areusedtomonitorandcontrolbudgetaryresourceswhicharepreparedfromthesamerecords.ThestatementsshouldbereadwiththerealizationthattheyareforacomponentoftheU.S.Government,asovereignentity.
Performance Goals, Objectives, and Results
TheOMBapprovedtheDepartment’sparticipationintheAFRpilotforFY2007.Aspartofthatpilot,theDepartmentwillincludeitsAnnualPerformanceReportinitsFY2009CongressionalBudgetJustification(CBJ).TheCBJwillbesubmittedtotheCongressinFebruary2008.ThelinksbelowtakeyoutotheDepartment’sperformanceinformation,includingplansandreports,andscoresonthePresident’sManagementAgenda.
�Department of Defense Agency Financial Report 2007Section 1: Management’s Discussion and Analysis
TheDepartment’sperformancebudgetrecognizesthateveryleveloftheDepartmentisaccountableformeasuringperformanceanddeliveringresultsatmultipletiersoftheorganizationthatsupporttheDepartment’sstrategicobjectives.Theperformancemeasuresandtargets,identifiedintheDepartment’sFY2007/2008Performance
Budget/Plan,arepresentedattheDepartment’senterpriselevel.However,somemeasuresandtargetswillundergoreevaluationforFY2009toensurethattheyareofacross-cuttingandstrategicnature.SucheffortsreflecttheevolutionarynatureoftheperformancebudgetandtheDepartment’scontinuingeffortstoensurethatperformanceassessmentislinkedtoidentifiableandmeasurablestrategicoutcomes.
TheDepartment’sFY2007/2008PerformanceBudget/Planidentifiesaselectnumberofperformancetargetsforgaugingsuccessamongalimitednumberofhighprioritystrategicobjectives.TheFY2007frameworkincludesfiveoverarchinggeneralstrategicgoals,17strategicobjectives,and42performancetargets.Inaddition,theDepartmentalsowillmonitorfiveclassifiedperformancetargetsthatarenotidentifiedinthedocumentthatisavailableonourpublicwebsite.ThisplanconstitutesthebasisagainstwhichperformanceresultsforFY2007willbeassessedintheDepartment’sCBJ.
Where and When the Department’s Performance Information Is Available
The Department of Defense Strategic Planhttp://www.defenselink.mil/qdr/report/Report20060203.pdf (Available now)
FY 2007/2008 Performance Budget/Planhttp://www.defenselink.mil/comptroller/defbudget/fy2008/fy2008_Performance_Budget.pdf (Available now)
FY 2009 Secretary’s Summary Justification (FY 2009 Performance Plan and FY 2007 Performance Report) http://www/defenselink.mil/comptroller/defbudget/FY2009 (Available February 2008)
The Department’s Scores on the President’s Management Agendahttp://www.whitehouse.gov/results/agenda/scorecard.html (Available now for the latest quarter)
10 Department of Defense Agency Financial Report 2007 Section 1: Management’s Discussion and Analysis
Analysis of Systems, Controls, and Legal Compliance
Annual Assurance Statement
UsingassessmentsaccordingtotheOMBCircularA-123,Management’sResponsibilityforInternalControlasthebasis,theDepartmentpreparedtheFY2007AnnualStatementofAssurance,presentedonthenextpage.TheDepartmentassertsthatallComponentshavereportedtotheSecretaryofDefensetheirindividualstatementsofassuranceoverinternalcontrols.ThetablesreferencedinthestatementappearinSection3:OtherAccompanyingInformation.
11Department of Defense Agency Financial Report 2007Section 1: Management’s Discussion and Analysis
Systems
TheFederalFinancialManagementImprovementAct(FFMIA)of1996requiresfederalagenciesto:
• ConformtotheU.S.GovernmentStandardGeneralLedgeratthetransactionlevel
• Complywithallapplicablefederalaccountingstandards
• EstablishfinancialmanagementsystemsthatmeetGovernment-widestandardsrequirements
• Supportfulldisclosureoffederalfinancialdata,includingthecostsoffederalprogramsandactivities
TheDepartment’sInspectorGeneralandtheauditagencieswithintheMilitaryServiceshavereportedontheDepartment’snoncompliancewiththeAct’srequirements.ManyoftheDepartment’slegacysystemsdonotcomplywiththewiderangeofrequirementsforsystemscomplianceand,therefore,donotprovidethenecessaryassurancestorelyoninformationcontainedineitherthelegacy(source)systemorthosesystemsthatwerefedinformationfromthelegacysystems.
Toresolvethesechallenges,theDepartment’sFIARPlanandtheETP,discussedpreviously,documentourstrategiesforimprovingprocessesandultimatelyachievingFFMIAcompliance.
Improper Payments Information Act Reporting
TheImproperPaymentsInformationAct(IPIA)of2002,asimplementedbyOMB,requiresfederalagenciestoreviewallprogramsandactivitiesannuallyandidentifythosethatmaybesusceptibletosignificanterroneouspayments.ForFY2007IPIAreportingresults,seeSection3:OtherAccompanyingInformation.
Other Management Information, Initiatives, and Issues
Looking Forward: Challenges for 2008 and Beyond
The“DefenseStrategyandStrategicPlanning”sectiondescribedinthe2006QuadrennialDefenseReview(QDR)incorporatestheNationalDefense,NationalMilitary,andNationalSecurityStrategies.PastQDRsfocusedontheproper“size”oftheforce.The2006QDRshapestheDepartment’sfuturewitha20-yearoutlookbylinkingstrategytodefenseresourcesandencompassingfourareasthatdrivecapabilitiesdevelopmentandforceplanning:
• Defeatingterroristnetworks• Defendingthehomelandin-depth• Shapingthechoicesofcountriesatstrategiccrossroads• Preventinghostilestateornon-stateactorsfrom
acquiringorusingweaponsofmassdestruction
TheseinterrelatedareasillustratethetypesofcapabilitiesandforcesneededtoaddressthechallengesdescribedintheNationalDefenseStrategy.TheyhavehelpedtheDepartmentshiftitsportfolioofcapabilitiestoaddressirregular,catastrophic,anddisruptivechallengeswhilesustainingcapabilitiestoaddresstraditionalchallenges.
AlthoughthesefocusareasdonotencompassthefullrangeofmilitaryactivitiesthattheDepartmentmayhavetoconduct,seniorleadershaveidentifiedthemasamongthemostpressingissues.Improvingcapabilitiesandforcestomeetthesechallengesalsowillincreasetheoveralladaptabilityandversatilityofourwarfightersinrespondingtootherthreatsandcontingencies.
BasedontheirevaluationofthefourQDRfocusareas,theDepartment’sseniorleadersdecidedtorefinethecapstoneforceplanningconstructthattranslatestheDepartment’sstrategyintoguidancetoshapeandsizemilitaryforces.ThisconstructrecognizesthattheUnitedStatesisanationatwar.TheDepartmentisusinglessonslearnedfromrecentandongoingoperationsinIraqandAfghanistanandmakingadjustmentstocapturetherealitiesofalongwarby:
• BetterdefiningtheDepartment’sresponsibilitiesforhomelanddefensewithinabroadernationalframework.
• Givinggreateremphasistothewaronterrorandirregularwarfareactivities,includinglong-durationunconventionalwarfare,counterterrorism,counterinsurgency,andmilitarysupportforstabilizationandreconstructionefforts.
• Accountingfor,anddrawingadistinctionbetween,steady-stateforcedemandsandsurgeactivitiesovermulti-yearperiods.
Atthesametime,thiswartimeconstructrequiresthecapabilitytoconductmultiple,overlappingwars.Inaddition,itcallsfortheforcesandcapabilitiesneededfordeterrence,reflectingashiftfrom“one-size-fits-all”deterrencetowardmoretailorablecapabilitiestodeteradvancedmilitarypowers,regionalweaponsofmassdestructionstates,ornon-stateterrorists.
The2006QDRprovidednewdirectionforacceleratingthetransformationoftheDepartmenttofocusmoreontheneedsofCombatantCommandersandtodevelopportfoliosofjointcapabilitiesratherthanindividualstove-piped
12 Department of Defense Agency Financial Report 2007 Section 1: Management’s Discussion and Analysis
programs.Theessenceofcapabilities-basedplanningistoidentifycapabilitiesthatadversariescouldemployandcapabilitiesthatcouldbeavailabletotheUnitedStates.Onceidentified,thepotentialintersectionsareevaluatedwhichhelpspreventover-optimizationofthejointforcesforalimitedsetofthreatscenarios.
ThisparadigmshiftcontinuesemphasisontheneedsoftheCombatantCommandersasthebasisforprogramsandbudgetarypriorities.ThegoalistoimprovetheDepartment’sabilitytomeettheneedsofthePresidentandtheCombatantCommandersthroughtheuseofjointcapabilityportfolios.Movingtowardamore“demand-driven”approachshouldreduceunnecessaryprogramredundancy,improvejointinteroperability,andstreamlineacquisitionandbudgetingprocesses.
ThisenvironmentalsoplacesnewdemandsontheDepartment’sTotalForceconcept.Althoughtheall-volunteerforcehasbeenakeytosuccessfulU.S.militaryoperationsoverthepastseveraldecades,itscontinuedsuccessisnotpreordained.TheTotalForceofActiveandReservemilitary,civilian,andcontractorpersonnelmustcontinuetodevelopthebestmixofpeopleequippedwiththerightskillsneededbytheCombatantCommanders.Tothisend,theQDRupdatestheDepartment’sworkforcemanagementpoliciestoguideinvestmentsintheforceandimprovetheworkforce’sabilitytoadapttonewchallenges.
The2006QDRwasdesignedtoserveasameanstospurtheDepartment’scontinuingadaptationandreorientation
toproduceatrulyintegratedjointforcethatismoreagile,morerapidlydeployable,andmorecapableagainstawiderrangeofthreats.Throughcontinuousimprovement,constantreassessment,andapplicationoflessonslearned,changesbasedonthisreviewwillcontinuetomeettheincreasinglydangeroussecuritychallengesofthe21stcentury.
Summary
Withoutdoubt,reshapingthedefenseenterpriseisdifficult.Thestructuresandprocessesdevelopedoverthepasthalf-centurywereforgedintheColdWarandstrengthenedovertimethroughoursuccesses.However,thestrategiclandscapeofthe21stcenturydemandsexcellenceacrossamuchbroadersetofnationalsecuritychallenges.
Militarymeansalonewillnotwintheglobalwaronterrororachieveothercrucialnationalsecurityobjectivesasdiscussedinthe2006QDR.Instead,theapplicationofdiplomacy,atthenationallevelandinconcertwithalliesandinternationalpartners,iscritical.Inadditiontocoalitionandpartner-supportedcombatandpreventiveoperations,interactionwithcivilianpopulationswillbeessential.ToachievethedesiredvisionrequiresdeterminationandperseverancewithintheDepartmentandtheAdministration,andcooperationwiththeCongress.
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