Foreign Military Sales: Air Force Controls Over the FMS Program Need
Improvement (Letter Report, 05/03/2000, GAO/AIMD-00-101).

Pursuant to a congressional request, GAO reviewed the Air Force's
accounting and reporting on the costs of the foreign military sales
(FMS) program.

GAO noted that: (1) the Air Force did not have adequate management
controls over its foreign military sales program to ensure that foreign
customer accounts were properly charged for goods and services; (2)
specifically, the Air Force was not generating reports that would
identify instances where customer accounts were not charged for goods
and services received or where there were discrepancies between the
recorded value of delivered goods and services and the corresponding
value of charges to customer accounts; (3) without such reports, the Air
Force could not readily ensure that FMS accounting records were accurate
and that customer accounts were properly charged; (4) GAO's analysis of
data contained in the Defense Finance and Accounting Service's Defense
Integrated Financial System as of July 1999, indicated that the Air
Force might not have charged FMS customer trust fund accounts for $540
million of delivered goods and services; (5) in performing a detailed
review of $96.5 million of these transactions, GAO found that the Air
Force was able to reconcile about $20.9 million; (6) however, of the
remaining $75.6 million, the Air Force had either: (a) failed to charge
customer accounts ($5.1 million, 22 transactions); (b) made errors, such
as incorrectly estimating delivery prices ($44 million, 11
transactions); or (c) could not explain differences between the recorded
value of delivered goods and services and corresponding value of charges
to customer accounts ($26.5 million or 19 transactions); (7) the Air
Force has since recognized that it must improve its controls over the
FMS program and developed the capability to generate data necessary to
help identify those instances where foreign customers' accounts have not
been charged for goods and services received; (8) however, according to
responsible Air Force officials, the data are going to be made available
only on an ad hoc basis, meaning that they will not be routinely
available to the appropriate personnel for review, including managers,
with the requirement that they use the information to ensure that
customer accounts are being properly charged; and (9) such steps are
integral to ensuring the accuracy of FMS accounting and the prompt
collection of funds owed.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-00-101
     TITLE:  Foreign Military Sales: Air Force Controls Over the FMS
	     Program Need Improvement
      DATE:  05/03/2000
   SUBJECT:  Foreign military sales
	     Foreign military sales costs
	     Trust funds
	     Federal agency accounting systems
	     Reporting requirements
	     Debt collection
	     Internal controls
	     Military cost control
IDENTIFIER:  Foreign Military Sales Program
	     Defense Integrated Financial System
	     South Korea
	     Saudi Arabia

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GAO/AIMD-00-101

Accounting and Information
Management Division

B-284676

May 3, 2000

The Honorable William S. Cohen
The Secretary of Defense

Dear Mr. Secretary:

Since October 1998, we have issued four reports on the results of our
reviews of the Department of Defense's (DOD) accounting and reporting on the
costs of the foreign military sales (FMS) program.1 These reports identified
internal control weaknesses that resulted in DOD's failure to properly
charge foreign military sales customers for goods and services already
received. In response to these reports, DOD has taken positive steps,
including the collection of over $400 million from FMS trust fund accounts,
to address our recommendations. This report presents the results of our
review of the Air Force's accounting for the FMS program.

The Air Force did not have adequate management controls over its foreign
military sales program to ensure that foreign customer accounts were
properly charged for goods and services. Specifically, the Air Force was not
generating reports that would identify instances where customer accounts
were not charged for goods and services received or where there were
discrepancies between the recorded value of delivered goods and services and
the corresponding value of charges to customer accounts. Without such
reports, the Air Force could not readily ensure that FMS accounting records
were accurate and that customer accounts were properly charged.

Our analysis of data contained in the Defense Finance and Accounting
Service's Defense Integrated Financial System (DIFS)2 as of July 1999,
indicated that the Air Force might not have charged FMS customer trust fund
accounts for $540 million of delivered goods and services. In performing a
detailed review of $96.5 million of these transactions, we found that the
Air Force was able to reconcile about $20.9 million. However, of the
remaining $75.6 million, the Air Force had either

ï¿½ failed to charge customer accounts ($5.1 million, 22 transactions);

ï¿½ made errors, such as incorrectly estimating delivery prices ($44 million,
11 transactions); or

ï¿½ could not explain differences between the recorded value of delivered
goods and services and corresponding value of charges to customer accounts.
($26.5 million or 19 transactions).

The Air Force has since recognized that it must improve its controls over
the FMS program and developed the capability to generate data necessary to
help identify those instances where foreign customers' accounts have not
been charged for goods and services received. However, according to
responsible Air Force officials, the data are going to be made available
only on an ad hoc basis, meaning that they will not be routinely available
to the appropriate personnel for review, including managers, with the
requirement that they use the information to ensure that customer accounts
are being properly charged. Such steps are integral to ensuring the accuracy
of FMS accounting and the prompt collection of funds owed. Our
recommendations, therefore, focus on implementing these requirements as well
as calling on the Air Force to review the transactions that were not
included in our detailed review to make certain that customer accounts are
properly charged.

In commenting on a draft of this report, DOD's Deputy Chief Financial
Officer (CFO) generally agreed with our recommendations and stated that the
Under Secretary of Defense (Comptroller) will request that the Air Force and
Defense Finance and Accounting Service implement our recommendations.

The Arms Export Control Act gives the President authority to sell defense
articles and services to eligible foreign countries, generally at no cost to
the U.S. government. While the Defense Security Cooperation Agency (DSCA)
has overall responsibility for administering the FMS program, the Army,
Navy, and Air Force generally execute the sales agreements--commonly
referred to as sales cases.

Foreign military sales are made on an individual case basis. A foreign
country representative initiates a case by sending a letter of request to
DOD asking for information, such as the price and availability of goods,
training, technical assistance, follow-on support, or other services. Once
the customer decides to proceed with the purchase, DOD prepares a Letter of
Offer and Acceptance (LOA) stating the terms of the sale for the items and
services being provided. After the LOA is accepted, the FMS customer is
generally required to pay, in advance, amounts necessary to cover costs
associated with the services or items purchased from DOD. The Department of
the Treasury holds these advance payments in an FMS trust fund.

DOD policy requires that FMS customer accounts be charged as goods and
services are delivered to the FMS customer. If, for some reason, DOD fails
to process the appropriate charges against the FMS trust fund accounts,
amounts paid in advance to cover the costs of goods and services FMS
customers receive could eventually be erroneously returned to the FMS
customers.

Our objective was to determine whether the Air Force was properly charging
FMS customer trust fund accounts for goods and services already provided. To
determine the requirements and procedures for charging the FMS trust fund
for goods and services, we reviewed applicable laws, regulations, policies,
and procedures. To assess whether the Air Force was effectively following
these requirements, we analyzed financial information from pertinent Air
Force and Defense Finance and Accounting Service (DFAS) accounting records
and reports.

Because Air Force systems did not produce reports to identify transactions
for which FMS customers had not been charged for goods and services already
received, we met with Office of the Secretary of Defense and Air Force
accounting officials to identify alternative sources of information. The
officials agreed that DFAS' foreign military sales accounting system, DIFS,
contained the data necessary to identify transactions in which FMS customers
have received goods and services but may not have been properly charged for
them.

In analyzing the DIFS' database as of July 1999, we identified 2,001 Air
Force FMS delivery transactions for which there were no charges comparable
to the value of the deliveries to indicate that the FMS customers' trust
fund accounts had been charged the full amount for goods and services
already received. In total, the value of 2,001 delivery transactions
exceeded the value of corresponding charges to the trust fund accounts by
$540 million.3 We judgmentally selected 150 of these transactions--totaling
$96.5 million--for further review. The following describes how we
judgmentally selected the 150 transactions.

ï¿½ DOD and Air Force officials agreed that an FMS customer's account should
show a charge for the value of goods and services received. Therefore, we
selected all those transactions for which the DIFS report showed that the
FMS customer had received goods and services but no charges had been
recorded against the trust fund accounts for the value of goods and services
received. In total, there were 146 of these transactions with an overall
difference totaling $28.3 million.

ï¿½ We selected four additional transactions with a total difference between
reported deliveries and charges of $68.2 million primarily based on
(1) large dollar differences between the value of reported deliveries and
charges or (2) previous audit findings which showed that the Air Force had
not charged the FMS customers promptly.

ï¿½ In further reviewing these transactions, we met with Air Force officials
knowledgeable about the FMS cases to identify the (1) value of goods and
services the FMS customer received and (2) amount that the FMS customer's
trust fund account had been charged for the goods and services. For those
transactions where it was determined that customers had not been charged or
errors were identified, we met with or contacted responsible Air Force and
DFAS officials to try to identify the underlying contributing causes.

We performed our work at DOD headquarters, Office of the Under Secretary of
Defense (Comptroller); Air Force Aeronautical Systems Center and Air Force
Security Assistance Center at Wright-Patterson Air Force Base, Dayton, Ohio;
and the Defense Finance and Accounting Service, Denver, Colorado. We
conducted our review from June 1999 through February 2000 in accordance with
generally accepted government auditing standards. The Office of the Under
Secretary of Defense provided written comments on a draft of this report.
These comments are discussed in more detail in the "Agency Comments and Our
Evaluation" section and are reprinted in full in appendix I.

Accounting

When we began our review, the Air Force did not have adequate information to
readily identify instances where FMS customer accounts were not being
properly charged for goods and services received or where there were
discrepancies between the recorded value of delivered goods and services and
the corresponding value of charges to customer accounts. According to
responsible Air Force officials, Air Force financial systems were not
programmed to produce such data.

Our review of data contained in DFAS' DIFS as of July 1999, indicated that
the Air Force may not have charged FMS customers' trust fund accounts for
$540 million of delivered goods and services, i.e., the recorded value of
delivered goods and services for these transactions was $540 million more
than the corresponding value of charges to the foreign customer accounts.

Our detailed review of $96.5 million of this amount--150 transactions--found
that the Air Force was able to reconcile about $20.9 million of the
differences, finding that these variances were due either to timing issues
or special freight forwarding refund accounts.4 However, of the remaining
$75.6 million, the Air Force had either failed to charge customer accounts,
made errors, or could not adequately explain the differences. Table 1
provides additional details.

Table 1: Reasons for Differences for Sampled Transactions

         Dollars in millions
               Reason                 Number of transactions Dollar amount
 Timing/refunds                       100                    $20.9
 Charges not processed to customer
 accounts                             22                     5.1
 Could not determine cause of
 difference                           19                     26.5
 Errors                               11                     44.0
 Totals                               152a                   $96.5

aTotal transactions exceed 150 because two transactions were included in two
categories.

The following sections describe our findings with regard to some of these
transactions.

For 22 transactions totaling $5.1 million, the Air Force had not charged FMS
customers' accounts for goods and services they had already received. One
transaction--the sale of three aircraft drones to the United Kingdom between
mid 1998 and early 1999 valued at $4.8 million--made up most of this total.
Since the drones were from Air Force inventory, the United Kingdom's account
should have been charged so that the appropriate Air Force account that was
used to initially purchase the drones could be reimbursed. However,
according to the Air Force official responsible for the United Kingdom
program, as of July 30, 1999, no charges had been processed against the
United Kingdom's account. The official stated that the United Kingdom's
account had not been charged because personnel initially responsible for
overseeing that this was done were replaced and the new personnel did not
follow up to ensure that the charges were processed. After we brought this
problem to the Air Force's attention, it collected $2.1 million of the $4.8
million owed and is planning to collect the remaining $2.7 million.

Similar mistakes were made for the remaining 21 transactions, which totaled
about $300,000. We found that these were reimbursable payment transactions
which required that funds be collected from the FMS customers' trust fund
accounts to allow the reimbursement of the DOD activities that initially
paid for the goods and services. However, because of errors in processing
the transactions, no actions had been taken to charge the FMS customers'
funds. Air Force officials told us that this was due primarily to
inexperienced staff who had since been notified of the mistake. After we
brought the problem to their attention, Air Force officials began collecting
the $300,000 owed.

With Charges

For 19 of the 150 transactions we reviewed, the Air Force could not
adequately explain $26.5 million in differences between the value of
reported deliveries and corresponding charges to the FMS customers' trust
fund accounts. For example, for one transaction involving the sale of F-15
aircraft to Saudi Arabia, the reported value of delivered goods and services
exceeded the reported charges against the trust fund account by
$48.1 million. A review of this difference identified errors and other
adjustments totaling $30.5 million that had resulted in the overstatement of
delivery values. Most of this amount--about $22 million--was due to the Air
Force's failure to revise its per unit delivery cost when it was determined
that charges for sustained engineering services initially factored into
overall costs were not required. However, the Air Force could not explain
the remaining $17.6 million difference. Air Force officials generally
believed that this remaining difference was also due primarily to incorrect
delivery prices, but could not provide documentation to support their
contention. Nor could they rule out the possibility that the Saudi's account
had not been properly charged for all goods and services received to date.

According to Air Force officials, these differences will eventually be
cleared up when all the goods and services associated with this case have
been delivered and the financial transactions are reconciled during the case
closure process. However, the reconciliation process is not expected to be
done until sometime in fiscal year 2001.

In another instance involving the sale of F-16 aircraft to South Korea, DFAS
accounting records showed that the value of delivered goods and services
exceeded the value of charges to South Korea's trust fund account by about
$14 million. Our review found that $12.2 million of the overstatement was
due to a miscalculation in the reported delivery price of 13 "kits" of
government-furnished equipment.5 However, there was still an additional $1.8
million difference remaining that the Air Force could not explain. As with
the Saudi Arabia transaction, the Air Force believed that the remaining
difference was due to additional incorrect delivery reporting but did not
rule out the possibility that South Korea's account may not have been
charged for all the goods and services already received. According to Air
Force officials, reconciliation of this case should be completed by the end
of fiscal year 2000.

During the course of our review, the Air Force recognized that it lacked a
tool that provided the information necessary to help identify those
instances in which FMS customers had either not been properly charged for
goods and services or errors had occurred in processing deliveries and
charges against the trust fund accounts. As a result, in August 1999, it
developed the capability to produce computer-generated data that would
identify those instances. However, Air Force officials responsible for
overseeing the development of the data told us that the information would be
made available only on an ad hoc basis. That is, while program officials
responsible for an FMS case would be trained to access and use the data to
assess the status of their FMS programs, the Air Force does not plan to
formally require that officials, including headquarters personnel, routinely
use the data to review FMS customer accounts to identify instances where
customers are not being properly charged or accounting errors may have
occurred--and then take corrective action. Such steps would provide FMS
program managers and decisionmakers with information and management
processes necessary to improve the Air Force's financial management of the
FMS program.

The Air Force has lacked adequate controls over foreign military sales
accounting to ensure that it (1) promptly charges FMS customer accounts to
recover its costs for delivered goods and services and (2) reconciles
accounting errors. It has since produced data that will help to identify
instances where FMS customers are not being properly charged. Nevertheless,
it must ensure that these data are routinely produced and used properly to
confirm that FMS customers' accounts are being properly charged.
Furthermore, since our review found that the differences for about 78
percent of the $96.5 million of transactions reviewed were caused by
accounting errors, failure to charge customers, or could not be determined,
it is important that the Air Force complete the review of the remaining
$443.5 million of balances to ensure that any amounts owed are promptly
collected and any errors and their causes are corrected.

We recommend that the Secretary of Defense direct the Secretary of the Air
Force to ensure that the (1) $5.1 million identified in this report as owed
by FMS customers is collected and (2) $26.5 million, for which the cause of
the differences could not be readily determined, is promptly reviewed and
resolved.

We also recommend that the Secretary of Defense direct the Secretary of the
Air Force to ensure that officials responsible for managing the FMS program,
including headquarters personnel, are (1) properly trained to use the data
being produced to identify instances in which FMS customers have not been
properly charged for goods and services received and (2) required to
routinely use the data at least monthly to review customer accounts,
identify instances in which they are not being properly charged, and act
promptly to correct the control problems causing the differences.

Lastly, we recommend that the Secretary of Defense direct the Air Force, in
cooperation with the Under Secretary of Defense (Comptroller) and the
Defense Finance and Accounting Service, to review the remaining
$443.5 million of transactions to (1) identify and collect any amounts FMS
customers owe for goods and services already provided, (2) correct any
erroneous transactions, and (3) determine the causes and act to eliminate
similar errors in the future. Cost-effectiveness should be considered when
selecting the transactions for detailed review.

In commenting on a draft of this report, the Defense Deputy Chief Financial
Officer agreed with our recommendations and stated that the Under Secretary
of Defense (Comptroller) will request that the Air Force and Defense Finance
and Accounting Service act to implement the recommendations.

However, with regard to the $540 million difference between DOD's reported
delivery value of goods and services and related disbursements, the Deputy
CFO noted that the Air Force sometimes uses estimated delivery prices,
instead of the actual value of the deliveries, when recording deliveries of
goods and services to FMS customers. He pointed out that the $540 million
GAO identified as reported differences between the value of deliveries and
DOD disbursements associated with those deliveries was based, in part, on
estimated delivery prices. Therefore, according to the Deputy CFO, because
estimates are involved, DOD does not agree that the $540 million difference
necessarily means that the FMS customers have not been properly charged for
goods and services received.

Our report does not state that the $540 million difference between
deliveries and disbursements was due to FMS customers not being properly
charged for goods and services received. Rather, it points out that DOD's
own records showed that FMS customers had received $540 million of goods and
services for which there was no corresponding disbursement recorded in DOD's
system to show that the FMS customers' accounts had been charged for the
goods and services. The $540 million was not a GAO estimate as the Deputy
CFO's letter states. We noted that this difference indicated only that FMS
customers may not have been properly charged for the goods and services and
that the differences should be reviewed to identify and collect any amounts
owed and correct any errors. In fact, we state that our review of $96.5
million of the differences found that
$75.6 million (78 percent) were due to accounting errors, failure to charge
customers, or could not be determined from the information in DOD accounting
records. The Deputy CFO recognized this distinction in his response when he
stated "With respect to the overall findings included in the draft report,
the GAO indicated that the Air Force might not have charged FMS customer
trust fund accounts for $540 million of delivered goods and services."
Finally, the thrust of our report recommendations, with which the DOD
agreed, is to determine the reasons for the remaining $443.5 million of
differences that we did not review, and to take appropriate action in those
cases where problems are identified.

This report contains recommendations to you. The head of a federal agency is
required by 31 U.S.C. 720 to submit a written statement on actions taken on
these recommendations to the Senate Committee on Governmental Affairs and
the House Committee on Government Reform no later than
60 days after the date of this report. A written statement must also be
submitted to the House and Senate Committees on Appropriations with the
agency's first request for appropriations made more than 60 days after the
date of this report.

We are sending copies of the report to Senators Ted Stevens, Fred Thompson,
John W. Warner, Robert C. Byrd, Carl Levin, Joseph I. Lieberman, and
Representatives Dan Burton, Stephen Horn, David R. Obey, Ike Skelton, Floyd
D. Spence, Jim Turner, Henry A. Waxman, and C. W. Bill Young in their
capacities as Chair or Ranking Minority Member of Senate and House
Committees and Subcommittees. We are also sending copies of this report to
the Honorable F. Whitten Peters, the Secretary of the Air Force, and the
Honorable Jacob J. Lew, Director of the Office of Management and Budget. We
will make copies available to others upon request.

If you have any questions regarding this report, please contact me or
Larry W. Logsdon, Assistant Director, at (202) 512-6240. Other key
contributors to this report were Harold P. Santarelli and John A. Spence.

Sincerely yours,
Linda D. Koontz
Associate Director, Governmentwide and Defense
Information Systems Issues

Comments From the Department of Defense

(511664)

  

1. The four reports are Foreign Military Sales: Millions of Dollars of
Nonrecurring Research and Development Costs Have Not Been Recovered
(GAO/AIMD-99-11 , October 20, 1998), Foreign Military Sales: Recovery of
Nonrecurring Research, Development, and Production Costs (GAO/AIMD-99-148R ,
May 19, 1999), Foreign Military Sales: Navy's Accounting for Sales to
Foreign Customers Needs Improvement (GAO/AIMD-99-213 , August 24, 1999), and
Foreign Military Sales: Efforts to Improve Administration Hampered by
Insufficient Information (GAO/NSIAD-00-37, November 22, 1999).

2. DIFS is the primary Defense Finance and Accounting Service's system used
to consolidate delivery and disbursement data. It is used to account for and
report on the status of DOD's foreign military sales programs to foreign
customers.

3. The actual difference for the 2,001 transactions totaled $750.6 million.
However, we excluded $210.6 million from this total because the Air Force
had already begun collecting this amount. In fact, as of December 1999, the
Air Force had completed this collection. We first identified these
outstanding charges, which related to nonrecurring research and development
costs for F-15 aircraft already delivered to Saudi Arabia, in a May 1999
report (GAO/AIMD-99-148R ). At the time, the Air Force had failed to recoup
$152.1 million of nonrecurring costs; however, as of July 1999, this
unrecouped balance had increased to $210.6 million.

4. Freight forwarding refund accounts are unique transactions used to track
and refund payments to foreign customers for freight costs that should have
been paid from the FMS trust fund account. DIFS records these refunds as
delivery transactions without recording corresponding charges against the
trust fund accounts.

5. The Air Force mistakenly computed the unit costs of "kits" of
government-furnished equipment resulting in an overstatement of $12.2
million of their actual value.
*** End of document. ***