Financial Management: Differences in Army and Air Force Disbursing and
Accounting Records (Letter Report, 03/07/2000, GAO/AIMD-00-20).

The reliability of contract disbursing data is critical to the ability
of the Army and the Air Force to effectively account and control for
billions of dollars in budget authority and prepare reliable financial
information on the results of its operations. The Defense Finance and
Accounting Service in Columbus, Ohio, makes tens of billions of dollars
in contract payments each year for the Army, the Air Force, and other
military organizations. The Center relies on the Mechanization of
Contract Administration Services (MOCAS) to process military contract
payment transactions. This report discusses (1) if, and to what extent,
contract payment transactions recorded in the Army and Air Force
official accounting records differed from MOCAS disbursing system
records; (2) the types of differences between the disbursing and
accounting systems and the causes for the differences; and (3) the
potential effect any identified deficiencies may have on the Defense
Department's planned improvements to the contract payment system.

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

 REPORTNUM:  AIMD-00-20
     TITLE:  Financial Management: Differences in Army and Air Force
	     Disbursing and Accounting Records
      DATE:  03/07/2000
   SUBJECT:  Comparative analysis
	     Accounting standards
	     Federal agency accounting systems
	     Defense procurement
	     Data integrity
	     Internal controls
	     Financial records
	     Financial management
	     Contractor payments
	     Accounting procedures
IDENTIFIER:  DOD Biennial Financial Management Improvement Plan
	     DOD Defense Procurement Payment System
	     DOD Defense Standard Disbursing System
	     DFAS Mechanization of Contract Administration Services
	     System

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GAO/AIMD-00-20

Appendix I: Objectives, Scope, and Methodology

22

Appendix II: Comments From the Department of Defense

25

Appendix III: GAO Contacts and Staff Acknowledgments

28

29

Table 1: Fiscal Year 1997 MOCAS Transactions That Were Recorded Differently
or Could Not Be Located in Accounting Systems
Used for Army 11

Table 2: Examples of Differences in Contract ACRN Balances
Between MOCAS and Accounting Records 14

Table 3: Strata for Army Sample of 534 Fiscal Year 1997 MOCAS Transactions
23

Table 4: Strata for Air Force Sample of 523 Fiscal Year 1997 MOCAS
Transactions 23

ACRN Accounting Classification Reference Number

DCMC Defense Contract Management Command

DFAS Defense Finance and Accounting Service

DOD Department of Defense

DPPS Defense Procurement Payment System

EOR element of resource

MOCAS Mechanization of Contract Administration Services

NULO negative unliquidated obligation

Accounting and Information
Management Division

B-283070

March 7, 2000

The Honorable Charles E. Grassley
United States Senate

Dear Senator Grassley:

The reliability of contract disbursing data is critical to the ability of
the Army and the Air Force to (1) effectively account for and control
billions of dollars in budget authority and (2) prepare reliable financial
information on the results of operations to support management and
congressional decision-making on programs, operations, and budget requests.
In response to your request, this report discusses Army and Air Force
accounting for contract disbursements. As noted in your request, we
previously reported serious problems in accounting for Department of Defense
(DOD) contract disbursements. (See the "Related GAO Products" list at the
end of this report.) For example, we reported1 that the appropriation
initially charged for a disbursement in the DOD disbursing system was
changed for 17 percent of the transactions when they were subsequently
recorded in the responsible Army units' accounting records.

The Defense Finance and Accounting Service (DFAS) payment center in
Columbus, Ohio, makes contract payments for the Army, the Air Force, and
other DOD organizations. In fiscal years 1997 and 1998, DFAS Columbus
contract payments totaled a reported $69 billion and $70.5 billion,
respectively. DFAS Columbus relies on the Mechanization of Contract
Administration Services (MOCAS) system to process DOD contract payment
transactions. MOCAS transactions are to be recorded in DFAS accounting
systems used for the Army and Air Force, which maintain the official
accounting records, including the availability and status of funds.

Our objectives were to determine (1) if, and to what extent, contract
payment transactions recorded in the Army and the Air Force official
accounting records differed from MOCAS disbursing system records,
(2) the types of differences between the disbursing and accounting systems
and, to the extent possible, the causes for the differences, and (3) the
potential effect any identified deficiencies may have on DOD's planned
contract payment system improvements.

Our sample results showed billions of dollars of differences in the way
contract payment transactions were originally recorded in MOCAS and the
applicable accounting systems prior to the mid-1990s for the Air Force and
prior to fiscal year 1999 for the Army. These differences related primarily
to manual processes for recording MOCAS transactions in the accounting
systems, which resulted in DFAS accounting station officials making a
different determination about how the transactions were to be recorded. Our
sample of fiscal year 1997 Army contract payment transactions showed that an
estimated $6.7 billion2 in MOCAS disbursement and collection transactions
were recorded differently or could not be located in the DFAS accounting
systems used to record Army transactions, including $2 billion recorded to
different appropriations in MOCAS and Army's accounting records. The current
electronic processes for recording MOCAS transactions in the applicable
accounting systems should reduce significantly the opportunity for such
differences. However, existing differences will ultimately result in the
need for adjustments to reconcile accounting and disbursing records and to
resolve uncertainties concerning the status of appropriated funds. For
example, a DFAS Army accounting station recorded one disbursement
transaction totaling $4.3 million to the fiscal year 1995 "Procurement of
Weapons and Tracked Combat Vehicles, Army" appropriation, while DFAS
Columbus recorded this same transaction to the fiscal year 1991 "Other
Procurement, Army" appropriation in MOCAS.

Further, our analysis showed that about one of every two dollars processed
by MOCAS was for adjustments to previously recorded disbursement
transactions and that billions of dollars of MOCAS adjustments were not
recorded in DFAS Army accounting station records. Prior to February 1999,
DFAS Columbus did not send most MOCAS adjustments to the DFAS accounting
stations that processed Army transactions because, according to DFAS
Columbus officials, the accounting stations did not generally accept MOCAS
adjustments. Based on our sample, we estimate that DFAS Columbus did not
report $21.6 billion3 of these transactions to DFAS Army accounting
stations. Unlike the Army adjustment transactions, most of the Air Force
adjustment transactions in our sample were recorded in Air Force accounting
records.

In addition to transaction-level differences, contract balances (including
obligations, disbursements, and unliquidated obligations) also differ
between MOCAS and the DFAS accounting systems used to process Army and Air
Force transactions. Differences in contract balances represent timing
differences and the cumulative effect of differences in the way that
disbursement and obligation transactions were previously recorded in MOCAS
and the accounting systems. Accurately maintaining these balances is
critical to ensuring that disbursements do not exceed available budget
authority and that the disbursements are made within the constraints imposed
by law. For the contract accounting lines associated with the transactions
in our Army sample, actual differences in balances amounted to about $909
million in obligations and about $908 million in disbursements between MOCAS
and the DFAS accounting systems used to process Army transactions. For the
contract accounting lines associated with the transactions in our Air Force
sample, actual differences amounted to about $1.3 billion in obligations and
about $1.4 billion in disbursements.4

DOD has a number of initiatives planned or under way to address acknowledged
deficiencies in its contract payment processes. One of the initiatives
involves a new contract payment system currently targeted to begin
implementation in June 2000. In March 1999, when we briefed DOD systems
integration officials on the magnitude of the differences in contract
payment data between MOCAS and accounting system records, DOD did not have a
plan for ensuring the reliability of contract payment data before
implementing the new system. As of August 1999, the Defense Contract
Management Command had proposed an overall approach to help ensure the
reliability of MOCAS data in the new system. The approach relies on
accelerating the closeout of existing contracts in MOCAS to the extent
possible and reconciling those contracts that would need to be loaded into
the new system. However, this high-level approach has not yet been approved
and incorporated into a detailed data conversion plan. This report discusses
the basic steps necessary for developing such a plan, including (1)
comparing the two sets of records to identify the magnitude of the
differences between MOCAS and the accounting records,
(2) stratifying the contracts by the number and amount of the differences so
that priorities for data cleanup can be established, (3) developing a policy
for addressing how the differences will be handled, and (4) for those
existing contracts that will be entered into the new system, including steps
in the plan to retain the transactional history of each contract, whether in
MOCAS or by some other automated means.

We are making recommendations that address the need for DOD to develop a
data conversion plan as part of its efforts to implement new corporate
procurement and contract payment systems.

Our results are based on a stratified random sample of 534 Army and
523 Air Force fiscal year 1997 MOCAS transactions totaling about
$5.6 billion and $8.2 billion, respectively. Fiscal year 1997 data were the
most current available for an entire fiscal year at the time we began our
review. The universe of Army transactions totaled 474,448 in the amount of
about $45.7 billion. The universe of Air Force transactions totaled
550,407 in the amount of about $84.9 billion.

As with any statistical analysis, the results are subject to some
uncertainty or sampling error because only a portion of the universe was
selected for review. Our projections are expressed as point estimates that
fall within confidence intervals. This means that if you were to determine
an estimate for 100 different random samples of the same size from this
population,
95 out of 100 times, the estimate would fall within the confidence interval.
In other words, the true value is between the lower and upper limits of the
confidence interval 95 percent of the time.

Our work was performed from May 1998 through August 1999 in accordance with
generally accepted government auditing standards. We performed our work
primarily at the DFAS Columbus, Ohio, disbursing center; the DFAS St. Louis,
Missouri, operating location;5 and the DFAS Dayton, Ohio, operating
location. Further details on our scope and methodology are included in
appendix I. We requested comments on a draft of this report from the
Secretary of Defense or his designee. The Under Secretary of Defense
(Comptroller) provided written comments, which are discussed in the "Agency
Comments and Our Evaluation" section and are reprinted in appendix II. DOD's
technical comments are also discussed but are not included.

DOD payment and accounting processes are complex, generally involving
separate functions carried out by separate offices in different locations
using different systems. For example, DOD has estimated that a dozen
organizations may be involved in making a single payment on a complex weapon
system and that over 31 different computer systems (feeder systems) are
relied on to support the various phases of the contracting process. In
addition, during fiscal years 1997 and 1998, DFAS accounting stations
generally recorded Army contract payments in four major accounting systems
and Air Force contract payments in two major accounting systems.

DFAS, created in 1991 to consolidate DOD payment and accounting functions
under one organization, performs disbursing and accounting functions for the
Army and the Air Force, as well as other DOD organizations. The various DOD
organizations use different disbursement and accounting systems and
processes, and different DFAS offices have been given responsibility for
providing disbursing and accounting services for these organizations.

DFAS Columbus Center uses MOCAS to make payments on contracts for all DOD
organizations, including the Army and the Air Force. As of June 1999, MOCAS
contained about 342,000 contracts. After recording contract disbursements,
collections, and adjustments, DFAS Columbus forwards transaction data to the
DFAS accounting stations responsible for recording these data in the various
DOD organizations' accounting systems. The DFAS St. Louis operating location
processes about 85 percent of the dollar value of Army transactions. During
fiscal year 1997 and most of fiscal year 1998, DFAS Army accounting stations
manually entered MOCAS contract payment transactions from hard-copy
documents into the various accounting systems used to record Army
transactions. DFAS Army accounting stations used a manual process because
contract transactions are recorded in the accounting systems used for the
Army at a greater level of detail than in MOCAS. In June 1998, DFAS
initiated action to automate the contract payment reporting process for the
five major Army commands. Due to system integration problems, most contract
payment transactions were still entered manually during fiscal year 1998.
However, as of August 1999, most MOCAS disbursement and collection
transactions were being sent electronically to the DFAS Army accounting
stations. According to DFAS officials, about 87 percent of the MOCAS
contract payment transactions sent electronically to DFAS Army accounting
stations were processed directly into the accounting system. The other
13 percent of the transactions sent electronically were rejected during
accounting system edit checks and had to be entered manually.

Prior to the mid-1990s, about half of the MOCAS contract payment
transactions for the Air Force were manually entered in the applicable
accounting systems, while the remainder of the MOCAS transactions were
transmitted electronically. By fiscal year 1997, DFAS Columbus
electronically transmitted most MOCAS transactions directly into the DFAS
accounting systems used for the Air Force.

Accounting Records Affect Data Reliability

Our sample results identified billions of dollars of differences in the way
contract payment transactions were recorded in MOCAS and the applicable
accounting systems. These differences resulted primarily from the manual
processes that were used to record MOCAS transactions in the accounting
systems prior to the mid-1990s for the Air Force and prior to fiscal year
1999 for the Army. With the current electronic transmission of MOCAS data,
most transactions are being recorded the same way in the DFAS accounting
systems used to record Air Force and Army transactions. However,
unreconciled discrepancies between these records resulting from the previous
manual processes remain a significant factor in DOD's ability to ensure
appropriations control as well as the reliability of its financial
reporting, including its annual financial statements.

Another significant factor that contributes to differences between these
records is the number of adjustment transactions. Our analysis of Army and
Air Force transactions showed that about one of every two dollars processed
by MOCAS in fiscal year 1997 was an adjustment to a previously recorded
disbursement. Moreover, prior to February 1999, most MOCAS adjustments were
not recorded in the accounting systems used for Army because, according to
DFAS Columbus officials, these accounting stations did not generally accept
MOCAS adjustments.

Timing differences and the cumulative effect of unreconciled differences in
the way that transactions were recorded in the applicable accounting systems
result in differences in obligation and disbursement balances charged to
specific accounting lines.6 In addition, the reliability of program and
object class data7 used for management decision-making and congressional
oversight is affected by the ongoing differences in these two sets of
records.

Our analysis of fiscal year 1997 Army and Air Force contract transactions,
the most current fiscal year data available at the time we began our review,
showed that Air Force disbursement and collection transactions were
generally recorded the same way in MOCAS and the DFAS accounting systems
used for Air Force; however, Army disbursement and collection transactions
differed by billions of dollars between MOCAS and the applicable accounting
systems. The nearly identical transaction posting in MOCAS and the Air Force
accounting records is primarily attributable to the electronic transfer of
MOCAS data to the accounting systems used for the Air Force. Army
differences related primarily to manual processes for recording MOCAS
transactions in the accounting systems used for the Army, which resulted in
DFAS accounting station officials making a different determination about how
the transactions were to be recorded. Specifically, our analysis of a
stratified random sample of 534 fiscal year 1997 Army transactions showed
that an estimated $6.7 billion8 in MOCAS disbursement and collection
transactions were recorded differently or could not be located in the
applicable accounting systems.

Of the estimated $6.7 billion in MOCAS transactions that were recorded to
different accounting lines or could not be located in Army accounting
records, we estimate that $2 billion9 was recorded to different
appropriations in MOCAS and accounting systems used to record Army
transactions. For example, of the transactions in our sample, we found that
a DFAS Army accounting station recorded one fiscal year 1997 disbursement
transaction totaling $4.3 million to the fiscal year 1995 "Procurement of
Weapons and Tracked Combat Vehicles, Army" appropriation, while DFAS
Columbus recorded this same transaction to the fiscal year 1991 "Other
Procurement, Army" appropriation in MOCAS. The DFAS Army accounting station
recorded another transaction totaling $242,051 to the fiscal year 1990
"Operation and Maintenance, Army" appropriation, while DFAS Columbus
recorded this transaction to the fiscal year 1995 "National Guard and
Reserve Equipment" appropriation in MOCAS.

In addition, we estimate that $1 billion10 of the $6.7 billion in MOCAS
transactions could not be located in the accounting systems used to record
Army transactions. DFAS St. Louis accounting station officials could not
determine whether those transactions that could not be located were included
in summary records or were not recorded at all in the Army's accounting
records. Summary records were used to record balances in the applicable
accounting systems for accounting stations that closed as part of the effort
to consolidate DFAS operations. As a result, detailed transaction data were
lost. Table 1 identifies the types of differences associated with the
transactions in our sample and provides our projection of the dollar impact
of these differences on Army accounting records.

Table 1: Fiscal Year 1997 MOCAS Transactions That Were Recorded Differently
or Could Not Be Located in Accounting Systems Used for Army

                                  Projected amount
 Type of difference               (Dollars in            Percentage
                                  billions)a             differencea
 Recorded to different accounting
 lines and different              $2.0                   4.4
 appropriations
 Transactions not located in the
 accounting systems               1.0                    2.3
 Recorded to different accounting
 lines but the same appropriation 3.7                    8.0
 Total recorded differentlyb      $6.7                   14.7

aThe projections represent the mid-point between the upper and lower ranges
of our confidence interval, at a 95-percent confidence level.

bEach category of difference in the table is separately projected.
Therefore, the total differences will not necessarily equal the sum of the
categories.

As shown in table 1, based on our analysis of the transactions in our
sample, we estimate that $3.7 billion11 in Army transactions was recorded to
different accounting lines but to the same appropriation. These differences
related to management and budget information, such as requisition number,
budget activity code, and element of resource (EOR) code associated with
contract deliverables. For example, our Army sample included transactions
for other services, supplies, and equipment totaling $12.3 million that were
recorded to different object classes in MOCAS and the applicable accounting
systems.

ï¿½ One transaction totaling $5.5 million was recorded to general equipment
investment in MOCAS but was recorded to other contractual services in the
accounting system used for the Army.

ï¿½ Three transactions totaling $1.4 million were recorded to general supplies
in MOCAS but were recorded to other contractual services in the applicable
accounting system.

ï¿½ Another transaction totaling about $1 million was recorded to other
contractual services in MOCAS but was recorded to general equipment
investment in the accounting system.

We previously reported12 that inaccurate reporting by object class hampers
congressional oversight. In addition, because the Congress has asked for and
is using object class information for its oversight activities, it is
important that these data be properly recorded.13

DOD's lack of adequate control over disbursements (outlays) of appropriated
funds also affects any analyses based on DOD's status of funds data. For
example, congressional budget and appropriation committees and the
Congressional Budget Office use historical outlay data in various analyses,
including (1) baseline outlay projections,14 (2) scoring of outlays from
appropriations,15 and (3) estimating the cost of legislative proposals.
Unreliable DOD contract payment data can impact such analyses and the
decisions based on the analyses.

Our analysis of Army and Air Force fiscal year 1997 MOCAS transactions also
showed that about one of every two dollars in transactions processed was for
adjustments to previously recorded disbursement transactions. For example,
during fiscal year 1997, DFAS Columbus processed 101,012 Army adjustment
transactions totaling $22.7 billion--about 50 percent of the $45.7 billion
in Army transactions processed. Also during fiscal year 1997, DFAS Columbus
processed 103,979 Air Force adjustment transactions totaling $41.5
billion--about 49 percent of the $84.9 billion in Air Force transactions
processed--to revise disbursing records maintained in MOCAS. Because of the
magnitude of MOCAS adjustments, we are continuing to review issues related
to them.

Moreover, prior to February 1999, DFAS Columbus did not send most MOCAS
adjustments to the DFAS Army accounting stations because, according to DFAS
Columbus officials, the accounting stations did not generally accept MOCAS
adjustments. For example, DFAS Columbus sent only 13 of the 231 MOCAS
adjustment transactions in our sample to the DFAS Army accounting stations
for recording in the accounting systems. The remaining 218 adjustment
transactions totaling $5 billion were recorded only in MOCAS. Of the total
$22.7 billion in MOCAS adjustment transactions, based on our sample, we
estimate that DFAS Columbus did not report $21.6 billion16 to DFAS Army
accounting stations. Unlike the Army adjustment transactions, most of the
237 Air Force adjustment transactions in our sample were recorded in Air
Force accounting records, primarily due to the automated transmission of
transactions.

According to DFAS St. Louis accounting officials, since a February 1999 DFAS
directive, DFAS accounting stations responsible for Army transactions
receive and record all MOCAS Army adjustment transactions in the accounting
systems. However, if accounting station personnel believe that the
adjustment is incorrect, they research the transaction, record any necessary
adjustment, and are to send the corrected adjustment and supporting
documentation to DFAS Columbus to help ensure that MOCAS and Army accounting
records agree.

Accounting Classification Reference Numbers, two-digit codes representing
accounting lines and commonly referred to as ACRNs, are a key element of
Army and Air Force funds control. Obligations are established at the ACRN
level to ensure that funds are available to cover disbursements. We found
differences between contract ACRN balances (including obligations,
disbursements, and unliquidated obligations) in MOCAS and the applicable
accounting systems. Differences in ACRN balances represent (1) timing
differences17 in recording transactions in MOCAS and the accounting systems
and (2) the cumulative effect of differences in the way that disbursement
and obligation transactions were previously recorded in MOCAS and the
accounting systems.

Because obligations are recorded at the ACRN level, maintaining these
balances accurately is critical to ensuring that disbursements do not exceed
available authority and that the disbursements are made within the
constraints imposed by law. For the ACRNs associated with the transactions
in our Army sample, actual differences in ACRN balances in MOCAS and the
accounting systems amounted to about $909 million in obligations and about
$908 million in disbursements. For the ACRNs associated with the
transactions in our Air Force sample, actual differences in ACRN balances
amounted to about $1.3 billion in obligations and about $1.4 billion in
disbursements. However, data were not available in both MOCAS and the
accounting systems for all of the balances associated with the ACRNs in our
Army and Air Force samples. Therefore, the total differences in ACRN
balances between MOCAS and the accounting systems would be expected to be
much greater for the transactions in our sample as well as in the total
population. Table 2 illustrates the differences in contract ACRN balances
for an Air Force contract ACRN and an Army contract ACRN included in our
samples.

Table 2: Examples of Differences in Contract ACRN Balances Between MOCAS and
Accounting Records

 Dollars in millions

                          MOCAS balance  Accounting records     Difference
                                         balance
 Air Force example--F-15I Flight Test Ground Station ACRN
 Obligations              $729.9         $725.2                 $4.7
 Disbursements            $534.5         $508.5                 $26.0
 Unliquidated obligations $195.4         $216.7                 $21.3
 Army example--Electronic communication equipment ACRN
 Obligations              $117.2         $82.5                  $34.7
 Disbursements            $117.0         $79.9                  $37.1
 Unliquidated obligations $0.2           $2.6                   $2.4

Discrepancies in ACRN balances undermine the reliability of Army and Air
Force account balances used for funds control and contract management
purposes. The Air Force example in table 2 shows that for the ACRN
identified, there is a $21.3 million difference in the amount available for
disbursement between what is recorded in MOCAS and the accounting records.
Similarly, the ACRN identified in the Army example shows a difference of
$2.4 million available to disburse for this equipment between MOCAS and the
official accounting records. Table 2 also indicates that DFAS Columbus may
have paid (1) $26 million more than what was recorded in the accounting
system used for the Air Force for the F-15I ground station and (2) $37.1
million more for electronic communication equipment than what was in the
applicable accounting system for the Army.

Conversely, more disbursements or less obligational authority could be
recorded in the accounting records than in MOCAS in some cases. This could
result in payments that exceed the available obligational authority
reflected in the accounting records. DOD's payment validation process is
intended to ensure that specific ACRNs have available obligational authority
before payments are made to avoid negative unliquidated obligations
(NULOs).18 As of September 30, 1998, DFAS headquarters reported $311 million
in Army NULOs and $228 million in Air Force NULOs based on accounting
systems data. These amounts represent reported NULOs related to all Army and
Air Force payment activity, including NULOs related to MOCAS contract
payment transactions. As of the same date, MOCAS reported $198.8 million in
Army NULOs and $115.8 million in Air Force NULOs related to contract
payments.

Payment Data

DOD has a number of initiatives planned or under way that are intended to
address acknowledged deficiencies in its contract payment processes,
including staffing, training, contract writing, and systems improvements.
However, DOD does not yet have a documented, detailed plan with milestone
dates for transitioning from MOCAS to the new contract administration and
payment systems, including resolving differences between MOCAS and
accounting records as a basis for establishing the initial balances in the
new system.

One of DOD's improvement initiatives is centered on a new contract payment
system currently targeted to begin implementation in June 2000. According to
DOD's 1998 Biennial Financial Management Improvement Plan, the initiative
would improve the accuracy and integrity of contract financial data, help to
reduce problem disbursements, and reduce reliance on paper documents.
According to DOD system integration officials, DOD's new concept of
operations envisions a single DFAS Corporate Database with end-to-end
processing of electronic transactions--from the point of origin (such as
approval of a purchase request) to obligation and control of funds
(including prevalidation19) to subsequent disbursing, accounting, and
financial reporting.

In addition to the DFAS Corporate Database, the planned system is to include
the Standard Procurement System,20 the Defense Procurement Payment System
(DPPS),21 the Defense Standard Disbursing System, and the Defense Accounting
System. The Standard Procurement System would replace the contract
administration functions currently performed by MOCAS. DPPS would replace
MOCAS contract payment functions, including computation of payment amounts,
automatic response to prevalidation requests, and transmission of payment
information to the Defense Standard Disbursing System for disbursement and
the Defense Accounting System for entry into official accounting records.

According to a DOD system integration directorate official, DOD began
testing the initial release of the corporate database in November 1999. DPPS
will begin supporting the contract payment function in October 2000. At that
time, all new contracts will be entered in the corporate database. However,
existing contracts will be maintained in MOCAS until a majority of the
existing contracts are closed out. According to DFAS and Defense Contract
Management Command (DCMC) officials working with the system integration
team, conversion of MOCAS contracts to the corporate database is expected to
be accomplished by September 2002. The DCMC official told us that DOD is
preparing a Defense Reform Initiative Directive that will address the time
frame for the MOCAS conversion.

DOD's planned corporate systems are designed to address some of the business
processes that have resulted in unreliable contract payment data. For
example, the new systems are to provide for electronic transfer of contract
payment transactions to the accounting systems used to process Army
transactions. The new systems are also intended to establish a single source
of data entry for DOD's accounting lines, thereby eliminating errors caused
by multiple entries of an accounting line to process a transaction.

In March 1999, when we briefed DOD systems integration officials on the
magnitude of the differences in contract payment data between MOCAS and
accounting system records, DOD did not yet have a plan for ensuring the
reliability of contract payment data before implementing the new system. As
of mid-August 1999, in response to an overall approach proposed by DCMC, DOD
was considering options for accelerating the closeout of existing contracts
in MOCAS and reconciling those contracts that would need to be loaded into
the new system.

However, DOD did not yet have a documented, detailed plan with milestone
dates for transitioning from MOCAS to the new contract administration and
payment systems, including resolving differences between MOCAS and
accounting records as a basis for establishing the initial balances in the
new system. One of the basic principles of any systems conversion project is
to ensure that accurate and complete data are entered in the new system.22 A
contract payment data conversion plan would need to include the following
basic steps.

ï¿½ Comparing MOCAS data to accounting system records to identify the
magnitude of the differences between the two sets of records.

ï¿½ Stratifying the contracts by the number and amount of the differences so
that priority can be given to data cleanup for those contracts with the
largest imbalances.

ï¿½ Developing a policy for addressing how the differences will be handled.
The goal of this effort is to determine the best information on the status
of funds available under the contract. For example, the policy may include a
provision for certain contracts to be maintained outside of the new system.
The criteria for such contracts should be specified. Also, the policy must
address whether contract reconciliation will be required or whether certain
records will be accepted as the best available information without a full
reconciliation. Again, the basis for that determination should be included
in the policy.

ï¿½ Finally, for those existing contracts that will be entered into the new
system, the plan should address (1) the feasibility of automating the data
entry process and (2) determine whether complete contract histories or
summary-level information will be entered in the new system. If the latter,
the plan should include steps to retain the transactional history of each
contract, whether in MOCAS or by some other automated means.

DOD has not yet completed a strategy for addressing the fundamental problem
of having two unreconciled sets of contract disbursing data for the Army and
the Air Force. Specifically, it has not yet developed a data conversion plan
to ensure the accuracy of contract payment data that will be loaded in the
new DOD corporate systems. Unless DOD addresses this issue, inaccurate
contract payment data will continue to (1) hinder DOD's ability to
accurately account for and report on contract disbursements and (2) affect
the reliability of DOD's financial reporting, including its reports on
budget execution and annual financial statements. As DOD moves forward to
implement its corporate procurement and payment systems, establishing
contract payment data accuracy will be critical to ensuring that DOD can
maintain accountability over its multibillion dollar annual contract
payments.

In implementing DOD's new corporate procurement and payment systems, we
recommend that the Secretary of Defense direct the Under Secretary of
Defense (Comptroller) and the DCMC to develop and implement a data
conversion plan identifying responsibilities and milestone dates for
resolving data reliability problems associated with existing contract
payment data. In developing such a plan, the Under Secretary of Defense
(Comptroller) and DCMC officials should consider the basic steps discussed
in this report, such as (1) comparing the two sets of records to identify
the magnitude of the differences between MOCAS and the accounting records,
(2) stratifying the contracts by the number and amount of the difference so
that priorities can be established, (3) developing a policy for addressing
how the differences will be handled, and (4) for those existing contracts
that will be entered into the new system, including steps to retain the
transactional history of each contract, whether in MOCAS or by some other
automated means.

In commenting on a draft of this report, DOD stated that the department
already had developed and implemented strategies for resolving differences
between MOCAS and applicable accounting systems. Such strategies include
forming contract reconciliation teams, allowing accounting stations access
into the MOCAS history files for research purposes, and implementing "fast
track" contract reconciliation procedures. In addition, DOD's response
stated that DFAS has established a DPPS conversion team to assist in
planning and overseeing the transition from MOCAS. A program management
office has been chartered to work with DCMC and the military components to
develop a strategy and more detailed supporting plans to better ensure that
the transition from MOCAS to DPPS results in an accurate, complete database
of information to support DPPS operations. According to DOD, these plans
will take into account all of the factors identified in our report as well
as methods for addressing each contract in force at the time of conversion.
DOD's response stated that this effort is formalized in a directive
currently forwarded to the Deputy Secretary of Defense for signature.

We are pleased that DOD is taking action to develop and document a
comprehensive plan that encompasses DOD's various contract reconciliation
and MOCAS conversion activities. We will review the new directive when it is
completed and approved.

DOD also provided several technical comments on the draft report, which we
have incorporated as appropriate throughout the report. However, DOD made a
comment regarding our sampling methodology that may indicate a
misunderstanding of statistical sampling techniques and therefore warrants
further explanation. DOD noted that the use of high-dollar, complex
transactions in our stratified random sample may have overstated the
projection of differences between MOCAS and the accounting stations. We
disagree and reiterate that our sample provided accurate projected results.
The stratified random sampling method we used--classical variable
sampling−is a commonly accepted statistical technique. This sampling
procedure takes into account the size of each stratum and only projects a
result within the individual stratum. The results of each stratum are then
added together to get a total projected error rate. This method took into
account the probability of an amount being selected and thus, is an
effective and appropriate means of projecting the dollar amount of
differences in MOCAS and the applicable accounting systems.

Further, DOD stated that the fiscal year 1997 data we reviewed were somewhat
dated and that it should not be assumed that similar differences exist for
more recent data. As stated in our report, the current electronic processes
for recording MOCAS transactions in the applicable accounting systems should
reduce significantly the opportunity for such differences. However, to the
extent that the differences we identified in fiscal year 1997 data relate to
contracts that remain open and unreconciled, the differences continue to
exist. For example, in discussing the planned MOCAS transition, a DCMC
official estimated that tens of thousands of MOCAS contracts will remain
open and need to be transferred to the new systems. Existing differences
will ultimately result in the need for adjustments to reconcile accounting
and disbursing records and to resolve uncertainties concerning the status of
appropriated funds.

We are sending copies of this letter to the Honorable William S. Cohen,
Secretary of Defense; the Honorable Louis Caldera, Secretary of the Army;
the Honorable F. Whitten Peters, Secretary of the Air Force; and Thomas
Blum, Director, Defense Finance and Accounting Service. We are also sending
a copy of this report to the Honorable Jacob J. Lew, Director of the Office
of Management and Budget, and to interested congressional committees.

Please contact me at (202) 512-9095 if you or your staff have any questions
on this report. Other GAO contacts and key contributors to this report are
listed in appendix III.

Sincerely yours,
Lisa G. Jacobson
Director, Defense Audits

Objectives, Scope, and Methodology

In response to your request, our objectives were to determine (1) if, and to
what extent, contract payment transactions recorded in the Army and the Air
Force official accounting records differed from MOCAS disbursing system
records, (2) the types of differences between the disbursing and accounting
systems and, to the extent possible, the causes for the differences, and (3)
the potential effect any identified deficiencies may have on DOD's planned
contract payment system improvements.

Our results are based on a stratified random sample of 534 Army and
523 Air Force fiscal year 1997 MOCAS transactions totaling about
$5.6 billion and $8.2 billion, respectively. Fiscal year 1997 data were the
most current available for an entire fiscal year at the time we began our
review. The universe of Army transactions totaled 474,448 in the amount of
about $45.7 billion. The universe of Air Force transactions totaled
550,407 in the amount of about $84.9 billion. Specifically, through review
of available data and discussions with DFAS officials, we

ï¿½ performed a comparative analysis of contract disbursements by accounting
lines associated with the transactions tested;

ï¿½ analyzed the results of the comparison to characterize differences in
terms of information in the two systems on both an individual transaction
basis and on a cumulative summary contract accounting (ACRN) level; and

ï¿½ identified (1) the type of differences (dollar amount, appropriation,
fiscal year, and program) between disbursing and accounting station records
and (2) the causes for the differences (to the extent possible).

As with any statistical analysis, the results are subject to some
uncertainty or sampling error because only a portion of the universe was
selected for review. Our projections are expressed as point estimates that
fall within confidence intervals. This means that if you were to determine
an estimate for 100 different random samples of the same size from this
population, 95 out of 100 times, the estimate would fall within the
confidence interval. In other words, the true value is between the lower and
upper limits of the confidence interval 95 percent of the time. The
following tables show the stratification of our Army and Air Force samples
by dollar amounts.

Table 3: Strata for Army Sample of 534 Fiscal Year 1997 MOCAS Transactions

 Strata     Universe                        Sample
            Transactions Absolute dollars   Transactions  Absolute dollars
 Under
 $10,000    287,695      $597,753,964.96    8             $13,794.00
 $10,000 to
 under      134,266      4,645,711,757.87   56            1,850,814.66
 $100,000
 $100,000
 to under   45,410       13,402,248.931.52  167           48,764,316.14
 $1 million
 $1 million
 to under
 $10        6,697        16,623,581,147.72  217           531,848,683.28
 million
 $10
 million to
 under $50  347          6,309,180,289.59   53            842,190,696.42
 million
 $50
 million    33           4,131,204,742.49   33            4,131,204,742.49
 and over
 Total      474,448      $45,709,680,834.15 534           $5,555,873,046.99

Table 4: Strata for Air Force Sample of 523 Fiscal Year 1997 MOCAS
Transactions

 Strata     Universe                        Sample
            Transactions Absolute dollars   Transactions  Absolute dollars
 Under
 $10,000    299,805      $769,504,858.24    3             $3,788.14
 $10,000 to
 under      178,946      6,174,476,239.51   36            1,398,937.62
 $100,000
 $100,000
 to under   60,812       17,279,482,685.06  105           30,631,289.05
 $1 million
 $1 million
 to under
 $10        9,793        27,174,223,137.76  173           444,621,702.94
 million
 $10
 million to
 under $100 1,011        27,193,689,175.55  189           5,068,204,588.95
 million
 $100
 million    40           6,271,957,518.76   17            2,659,305,024.93
 and over
 Total      550,407      $84,863,333,614.88 523           $8,204,165,331.63

To assess the potential effect of identified differences on the reliability
of information recorded in MOCAS and the corresponding Army and Air Force
accounting records, we projected the results of our samples and analyzed the
extent and nature of the differences on Army and Air Force accounting
records. We also considered the results of our past Army and Air Force work.
We did not determine the accuracy of transactions recorded in MOCAS and the
applicable DFAS accounting systems because DFAS was unable to provide us
with adequate supporting documentation to make such a determination.

To determine the effect any identified deficiencies would have on DOD's
planned contract payment systems improvements, we reviewed the status of
DOD's efforts to develop a concept of operations for the development of the
Defense Corporate Database and its supporting systems. We also met with
DOD's systems integration team to discuss the impact of MOCAS data
reliability problems on the planned systems.

Our work was performed from May 1998 through August 1999 in accordance with
generally accepted government auditing standards. We performed our work
primarily at the DFAS Columbus, Ohio, disbursing center; the DFAS St. Louis,
Missouri, operating location; and the DFAS Dayton, Ohio, operating location.

Comments From the Department of Defense

GAO Contacts and Staff Acknowledgments

Gayle L. Fischer, (202) 512-9577
Keith E. McDaniel, (937) 258-7955

In addition to those named above, Brian Chan, Francine DelVecchio, James
Loschiavo, Robert C. Sommer, and Evert A. Stevens made key contributions to
this report.

Related GAO Products

Financial Management: Analysis of DOD's First Biennial Financial Management
Improvement Plan (GAO/AIMD-99-44 , January 29, 1999).

Major Management Challenges and Program Risks: Department of Defense
(GAO/OCG-99-4 , January 1999).

Financial Management: Problems in Accounting for Navy Transactions Impair
Funds Control and Financial Reporting (GAO/AIMD-99-19 , January 19, 1999).

Financial Management: Improvements Needed in Air Force Vendor Payment
Systems and Controls (GAO/AIMD-98-274 , September 28, 1998).

Financial Management: Seven DOD Initiatives That Affect the Contract Payment
Process (GAO/AIMD-98-40 , January 30, 1998).

Department of Defense: Financial Audits Highlight Continuing Challenges to
Correct Serious Financial Management Problems (GAO/
T-AIMD/NSIAD-98-158 , April 16, 1998).

Financial Management: DOD Progress Payment Distribution Procedures
(GAO/AIMD-97-107R , July 21, 1997).

Financial Management: Improved Reporting Needed for DOD Problem
Disbursements (GAO/AIMD-97-59 , May 1, 1997).

Contract Management: Fixing DOD's Payment Problems Is Imperative
(GAO/NSIAD-97-37 , April 10, 1997).

Financial Management: Strong Leadership Needed to Improve Army's Financial
Accountability (GAO/AIMD-94-12 , December 22, 1993).

(918970)

Table 1: Fiscal Year 1997 MOCAS Transactions That Were Recorded Differently
or Could Not Be Located in Accounting Systems
Used for Army 11

Table 2: Examples of Differences in Contract ACRN Balances
Between MOCAS and Accounting Records 14

Table 3: Strata for Army Sample of 534 Fiscal Year 1997 MOCAS Transactions
23

Table 4: Strata for Air Force Sample of 523 Fiscal Year 1997 MOCAS
Transactions 23
  

1. Financial Management: Strong Leadership Needed to Improve Army's
Financial Accountability (GAO/AIMD-94-12 , December 22, 1993).

2. The range of our confidence interval, at a 95-percent confidence level,
indicates that the actual amount of MOCAS transactions that were recorded
differently or could not be located in the DFAS accounting system for Army
was between $5.9 billion and $7.6 billion.

3. The range of our confidence interval, at a 95-percent confidence level,
indicates that the actual amount of adjustments that were not reported to
DFAS Army accounting stations would be between $20.1 billion and $22.7
billion.

4. These differences represent only the balances associated with the
accounting lines in our Army and Air Force samples for which data were
available in both MOCAS and the accounting system. Therefore, the total
differences in accounting line balances between MOCAS and the applicable
accounting systems would be expected to be much greater in our sample as
well as the total population.

5. Operating locations, also known as OpLocs, are DFAS accounting and
disbursing stations.

6. DOD uses accounting lines to accumulate appropriation, budget, and
management information for contract obligations and payments.

7. Object classes, established by the Office of Management and Budget, are
used to report obligations for each account, according to the nature of the
services or articles procured.

8. The range of our confidence interval, at a 95-percent confidence level,
indicates that the actual amount of MOCAS transactions that were recorded
differently or could not be located in the DFAS accounting systems used for
Army was between $5.9 billion and
$7.6 billion.

9. The range of our confidence interval, at a 95-percent confidence level,
indicates that the actual amount of differences between the appropriations
charged in MOCAS and the DFAS accounting systems used for Army was between
$1.6 billion and $2.4 billion.

10. The range of our confidence interval, at a 95-percent confidence level,
indicates that the actual amount of MOCAS transactions that could not be
located in the DFAS accounting systems used for Army was between $0.8
billion and $1.3 billion.

11. The range of our confidence interval, at a 95-percent confidence level,
indicates that the actual amount of MOCAS transactions that could not be
located in the accounting system used for Army was between $3 billion and
$4.4 billion.

12. DOD Consulting Services: Erroneous Accounting and Reporting of Costs
(GAO/
NSIAD-98-136 , May 18, 1998).

13. Section 512 of Public Law 102-394 directed that OMB create a new object
class for reporting actual and planned obligations for advisory and
assistance services. In 1994, the Federal Acquisition Streamlining Act
(section 2454) codified section 512 as 31 U.S.C. 1105(g).

14. Baseline outlay projections are based on spend-out rates, which vary by
both organization and the appropriation involved. For example, spend-out
rates would differ for Army and Air Force procurement.

15. Scorekeeping is the process of estimating the budgetary effects of
pending and enacted legislation and comparing them to limits set in the
budget resolution or legislation. Scorekeeping tracks data such as budget
authority, receipts, outlays, the surplus or deficit, and the public debt
limit.

16. The range of our confidence interval, at a 95-percent confidence level,
indicates that the actual amount of adjustments that were not reported to
the accounting stations would be between $20.1 billion and $22.7 billion.

17. For the Army, timing differences for our sample of fiscal year 1997
transactions averaged 37 days due to the manual processes for recording
MOCAS transactions in the applicable DFAS accounting systems. For the Air
Force, DFAS officials stated that timing differences were generally limited
to about 3 days.

18. NULOs occur when recorded disbursements exceed recorded obligations,
indicating that expenditures may exceed amounts obligated.

19. Prevalidation is a process whereby DOD disbursing stations prematch
disbursements, subject to various dollar thresholds, with recorded
obligations to ensure that agency funds are available.

20. The objective of the Standard Procurement System (SPS) is to establish a
fully functional automated procurement information system, which will be
used to prepare and administer procurement contracts. SPS is planned to
replace DOD's manual procurement systems and about 76 unique automated
procurement systems that are used to prepare contracts, including the
contract administration functions performed by MOCAS.

21. DPPS is intended to be the single standard DOD system for calculating
contractor payments and generating accounting records. It is expected to
standardize and improve contract payment processes by computing timely and
accurate payments and making disbursement data available to DOD entities
responsible for procurement, logistics, and accounting.

22. See, for example, Systems Auditability and Control Report, "Module 5:
Managing Information and Developing Systems" (The Institute of Internal
Auditors Research Foundation, December 1991).
*** End of document. ***