Financial Management: Status of Defense Efforts to Correct Disbursement
Problems (Letter Report, 10/05/94, GAO/AIMD-95-7).

Despite numerous audit reports during the past 14 years that repeatedly
cited internal control weaknesses, the Defense Department (DOD)
continues to experience problems in accounting for disbursements. Not
being able to properly match a disbursement to an obligation is a
serious, fundamental breakdown in internal controls and DOD's fund
control systems. Although DOD has taken some initial steps to overcome
its disbursement problems, serious weaknesses still plague DOD's
systems, as evidenced by the nearly $25 billion in problem disbursement
transactions identified as of June 1994. Intensified and sustained
top-level management commitment, as called for by the DOD Comptroller,
will be needed to resolve the disbursement problems. In the short term,
DOD's efforts, such as its manual research of problem disbursement
transactions to correct errors, will likely reduce the amount of
disbursement not properly matched to obligations. However, the
disbursement problem will not be adequately resolved until weaknesses in
control procedures that allow problem disbursement to occur are
corrected and improvements are made to DOD's contract pay and accounting
systems.

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

 REPORTNUM:  AIMD-95-7
     TITLE:  Financial Management: Status of Defense Efforts to Correct 
             Disbursement Problems
      DATE:  10/05/94
   SUBJECT:  Federal agency accounting systems
             Internal controls
             Erroneous payments
             Balances of budget authority
             Defense appropriations
             Expired appropriations
             Accounting procedures
             Financial records
             Financial management
             Risk management
IDENTIFIER:  DOD Corporate Information Management Initiative
             DFAS Mechanization of Contract Administration Services 
             System
             DFAS Financial Systems Plan
             CIM
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to Congressional Requesters

October 1994

FINANCIAL MANAGEMENT - STATUS OF
DEFENSE EFFORTS TO CORRECT
DISBURSEMENT PROBLEMS

GAO/AIMD-95-7

DOD Unmatched Disbursements


Abbreviations
=============================================================== ABBREV

  CIM - Corporate Information Management
  DFAS -
  DOD - Department of Defense
  MOCAS - Mechanization of Contract Administration Services
  ULO - unliquidated obligations

Letter
=============================================================== LETTER


B-257777

October 5, 1994

The Honorable John Glenn
Chairman, Committee on
 Governmental Affairs
United States Senate

The Honorable Charles E.  Grassley
United States Senate

In response to your requests, we reviewed the Department of Defense's
(DOD) efforts to resolve its problems in properly matching
disbursements with the corresponding obligations.  Matching
disbursements with recorded obligations is an important control for
ensuring that agency funds are used in accordance with the purposes
and limitations specified by the Congress.  Without such matching,
there is a substantial risk that (1) fraudulent or erroneous payments
may be made without being detected and (2) cumulative amounts of
disbursements may exceed appropriated amounts and other legal limits. 

Long-standing problems have plagued DOD's efforts to properly match
disbursements with obligations.  Since 1980, we have issued 12
reports\1 pertaining to DOD's disbursement problems, including
negative unliquidated obligations (ULOs)\2 recorded in DOD's
accounting records and overpayments made to contractors.  For
example, in June 1993, we reported that as of December 19, 1992, one
of the Navy's primary accounting systems alone contained $13.6
billion of unmatched disbursements.\3

In July 1993, DOD established a team to address its chronic
disbursement problems and lack of progress in reducing the amount of
disbursements not properly matched to obligations.  According to the
team leader, $41 billion of disbursements on DOD's records had not
been matched to obligations as of June 30, 1993.  This amount
included $19.1 billion that the team identified as problem
disbursements for which (1) at least one attempt to properly match
the disbursement to a corresponding obligation had failed or (2)
recorded expenditures exceeded obligations, thus causing a negative
ULO.  DOD used these two types of problem disbursements to establish
a $19.1 billion benchmark against which it measured and reported its
progress in reducing problem transactions. 

Our review (1) assessed DOD's progress in resolving problem
disbursement transactions, (2) evaluated DOD's criteria for
identifying and reporting disbursements not properly matched to
obligations, and (3) identified systemic control weaknesses that keep
DOD from resolving its disbursement problems.  As agreed with your
offices, we are continuing to review the status of DOD's disbursement
problems and measures to take corrective actions. 


--------------------
\1 See Related GAO Products list at the end of this report. 

\2 Transactions result in negative ULOs when the recorded
expenditures exceed the amount obligated.  Generally, this occurs
when (1) a contractor is paid too much, (2) the wrong appropriation
account or customer is charged when a payment is made, or (3)
information on an obligation, payment, or collection transaction is
inaccurately or incompletely processed. 

\3 Financial Management:  Navy Records Contain Billions of Dollars in
Unmatched Disbursements (GAO/AFMD-93-21, June 9, 1993). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

DOD has made some progress in reducing problem disbursement
transactions.  According to DOD's progress reports, as of June 30,
1994, it had reduced the $19.1 billion of reported problem
disbursements by $9.4 billion.  We do not agree, however, with $3.6
billion of that total which DOD improperly reported as a reduction
after it reclassified certain disbursements as negative ULOs--which
are themselves problem transactions that still need to be resolved. 
While it was proper to reclassify the transactions as negative ULOs,
it was not proper to report them as resolved. 

In addition, DOD's $19.1 billion initial benchmark for its
disbursement problems was understated--principally because DOD's
criteria for assessing the extent of the problem did not consider all
types of problem disbursement transactions.  For example, DOD did not
include $14.8 billion of disbursement transactions that were over 60
days old but had not been received by an accountable activity for
matching with an obligation. 

According to our analysis of disbursement data, DOD's records
contained at least $24.8 billion of problem disbursements as of June
30, 1994.  The $24.8 billion included about $5 billion of problem
disbursement transactions related to canceled "M" account balances
that DOD has not been able to reconcile.  DOD Comptroller officials
acknowledged that the original benchmark figure understated the
problem and told us that they planned to revise the figure to more
accurately show DOD's overall problem disbursements.  However, the
officials could not specify when they would begin reporting the
revised data. 

Over the past year, DOD has undertaken several initiatives to address
its long-standing disbursement problem.  These included short-term
efforts to identify the extent of the problem and attempts to reduce
it using mostly manual efforts.  DOD also has a number of long-term
efforts aimed at improving its contract pay and accounting systems. 
However, correcting the disbursement problems will not be an easy
task given DOD's failure over the years to practice sound financial
management principles and the extremely poor quality of its automated
contract pay and accounting systems.  Unless accounting discipline
and improved internal controls are emphasized and enforced in the
short term, DOD's problem disbursements may be generated as fast as
its special teams can resolve them.  In the long term, DOD must
improve payment and accounting systems and internal control features
to avoid making payments that cannot readily be matched to
corresponding obligations. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Federal agencies, including DOD, are responsible for ensuring that
their funds are expended in accordance with the purposes and
limitations specified by the Congress.  DOD Directive 7200.1
specifies the requirements for accounting and fund control systems
that DOD activities are to follow to comply with congressional
purposes and limitations.  For example, the Directive states that
these systems are to ensure that funds are used only for
congressionally authorized purposes and that payments are not to
exceed amounts available. 

In order to comply with legal and regulatory requirements, DOD
organizations' accounting and fund control systems must be able to
record disbursements as expenditures of appropriations and as
reductions of previously recorded obligations.  Proper matching of
disbursements with related obligations is necessary to ensure that
the agency has reliable information on the amount of funds available
for obligation and expenditure. 

DOD's administrative control procedures are intended to prevent
unauthorized disbursements and purchases and to ensure that DOD
organizations do not obligate or spend more funds than the Congress
has appropriated.  These control procedures require DOD organizations
to (1) commit or administratively reserve funds based on firm
procurement directives, orders, requisitions, or requests, (2) record
obligations in appropriation account(s) when they place an order,
award a contract, or receive a service, and (3) match disbursements
with the related obligations in the accounting records as payments
are made. 

Certain DOD organizations commit and obligate funds, and other DOD
offices generally disburse the funds.  For example, during fiscal
year 1993, the Columbus Center of the Defense Finance and Accounting
Service (DFAS), one of DOD's major contract paying activities,
administered over 370,000 contracts valued at $482 billion and paid
over 1 million invoices totaling $64 billion.  Disbursing offices,
such as DFAS-Columbus, are required to ensure that (1) payments are
made only for goods and services authorized by purchase orders,
contracts, or other authorizing documents, (2) the government
received and accepted the goods and services, and (3) payment amounts
are accurately computed.  They are also responsible for ensuring that
accounting data on payment supporting documents are complete and
accurate. 

In order to match disbursements with the corresponding obligations
and record the transactions into the accounting records, the
disbursement data must flow from the activity making the
disbursements (paying activity) to the activity responsible for
matching the payment to its corresponding obligation and recording
the transaction in the accounting records (accountable activity). 
The flow of data from the paying activity to the accountable activity
varies by military service.  For example, Air Force transactions
generally flow from the paying activities through the DFAS-Denver
Center to the Air Force accountable activities.  Navy disbursements
flow essentially the same way, except the data flows through the
DFAS-Cleveland Center to the accountable activities.  The Army uses a
more simplified flow:  its disbursements generally flow from the
paying activity directly to the Army accountable activity if the
paying activity is an Army activity or the DFAS-Columbus Center. 
Disbursements made for the Army by the Air Force, Navy, and non-DOD
organizations flow through the DFAS-Indianapolis Center to the Army
accountable activities. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To measure DOD's progress in resolving problem disbursements and
evaluate DOD's criteria for identifying and reporting on
disbursements that could not be properly matched to obligations, we
met with the DFAS officials responsible for identifying the universe
of transactions to discuss and assess how they determined if all
disbursements not properly matched with obligations were included and
correctly reported.  We also analyzed the criteria DOD used to
establish the $19.1 billion as its benchmark for reporting progress
in correcting disbursements not properly matched to obligations. 

We obtained the dollar values of disbursements discussed in this
report from agency reports or compiled them from agency records.  We
did not verify the accuracy of disbursement data included in agency
reports or records because the data consisted of hundreds of
thousands of disbursement transactions.  Consequently, we cannot
provide any assurance that the $24.8 billion of problem disbursements
that had not been properly matched to obligations as of June 30,
1994, are correct and that total problem disbursements will not prove
to be greater when all the facts are known. 

To identify systemic control weaknesses that keep DOD from solving
its disbursement problems, we reviewed audit reports and the
Secretary of Defense's fiscal year 1993 Annual Statement of Assurance
under the Federal Managers' Financial Integrity Act.  To assess the
DOD team's progress in addressing these weaknesses, we spoke with
team officials at DFAS centers and headquarters and reviewed various
progress reports and other internal documents on disbursement
problems and corrective actions taken or planned. 

We performed our work at the offices of the DOD Comptroller,
Washington, D.C.; the Air Force Materiel Command, Dayton, Ohio; the
Army Materiel Command, Alexandria, Virginia; Headquarters, DFAS,
Arlington, Virginia; and the following DFAS Centers:  Denver,
Colorado; Indianapolis, Indiana; Kansas City, Missouri; Columbus,
Ohio; and Cleveland, Ohio.  Our work was performed between November
1993 and September 1994 in accordance with generally accepted
government auditing standards. 

As agreed with your offices, we did not obtain written DOD comments
on a draft of this report.  However, we discussed the results of our
review with officials from the DOD Comptroller's Office and DFAS and
have incorporated their views where appropriate.  These officials
generally agreed with our findings. 


   DOD HAS MADE SOME PROGRESS IN
   REDUCING PROBLEM DISBURSEMENT
   TRANSACTIONS
------------------------------------------------------------ Letter :4

DOD reported that it had reduced its problem disbursements from the
benchmark figure of $19.1 billion to $9.7 billion--a $9.4 billion
reduction--as of June 30, 1994.  Although we agree that DOD has made
some progress, DOD's reduction was actually $5.8 billion.  We found
that $3.6 billion of the reported reduction was for problem
disbursements that the Navy reclassified as negative ULOs-- which
still must be resolved. 

According to the DOD team leader, prior to December 1993, one of the
Navy's accounting systems would not accept a payment transaction if
it would result in a negative ULO.  Instead, the Navy's system would
reject such transactions to a suspense file that included
disbursements that had not been matched to obligations.  When DOD
established the June 1993 benchmark for Navy transactions, it
included the amounts in the suspense file and--therefore, the Navy
negative ULOs--in the $19.1 billion benchmark. 

In December 1993, the Navy changed its system procedures and began
processing the rejected transactions as negative ULOs.  At that time,
DOD reclassified these transactions as negative ULOs and took them
off the "problem" list.  We informed DOD on several occasions that
while these transactions were properly reclassified as negative ULOs,
they should not have been removed from the "problem" list simply
because they were reclassified from one category of problem
transaction to another.  Although the officials agreed that the
negative ULOs were problem disbursements that still needed to be
resolved, they continued to report them as resolved in measuring and
reporting on DOD's progress to the Senate Committee on Governmental
Affairs and the House Committee on Government Operations, Legislation
and National Security Subcommittee.  For example, on April 12, 1994,
the DOD Comptroller testified before the Senate Committee that as of
February 1, 1994, DOD had reduced the $19.1 billion benchmark figure
by $7.1 billion.  However, our analysis showed that as of that date,
$3.2 billion of unresolved Navy negative ULOs were included in the
$7.1 billion reduction. 


   DOD TEAM DID NOT INITIALLY
   IDENTIFY THE FULL EXTENT OF
   DISBURSEMENT PROBLEMS
------------------------------------------------------------ Letter :5

Compounding DOD's disbursement problem is the fact that the June 1993
benchmark, which is used to measure and report DOD's progress, did
not include all types of problem transactions.  As a result, DOD
significantly understated the magnitude of problem disbursements by
billions of dollars.  After we brought this to DOD officials'
attention, DOD began, in March 1994, to collect data on the problem
disbursement transactions that were not originally included under the
criteria DOD used to establish its benchmark.  Using the revised
criteria, our analysis showed that DOD's records contained at least
$24.8 billion\4 in problem disbursement transactions as of June 30,
1994.  DOD Comptroller officials stated that they plan to update the
original benchmark figure to show DOD's total disbursement problem
but could not tell us when it would be reported. 

The original criteria DOD used to define problem disbursements and
the revised criteria DOD began using in March 1994 differed in
several ways.  According to DOD Comptroller officials, this was DOD's
first effort to quantify its overall disbursement problem.  In order
to establish a benchmark amount in a reasonable period of time, DOD
officials stated, they initially focused on known problems to
establish their criteria for defining problem transactions. 

As a result, DOD did not identify certain categories of problem
disbursements which should have been included to more fully disclose
the extent of the disbursement problem.  Specifically, as discussed
in the following sections, DOD (1) used net rather than gross
disbursement balances, which significantly lowered the amount
reported, (2) did not include disbursement problems for certain
activities in its figures, and (3) did not consider certain
disbursement transactions if initial matching efforts had not been
attempted. 


--------------------
\4 Balances totaling $2 billion for some activities were as of April
30, 1994, because they were the most current data available at the
time of our audit. 


      NETTING POSITIVE AND
      NEGATIVE BALANCES LOWERED
      REPORTED TOTALS
---------------------------------------------------------- Letter :5.1

We found that some DOD activities had been offsetting positive and
negative balances, thus reporting lower amounts.  For example, if a
contract had $10 million of positive obligation balances and $15
million of negative obligation balances, the activity would net the
two balances and report the $5 million of negative balances as
problem disbursements. 

DOD's progress report on disbursements showed that as of March 31,
1994, DFAS-Denver had $630 million of negative ULOs that were
determined by netting positive and negative balances.\5 At our
request, DFAS-Denver developed a computer program to identify and
summarize its negative ULO transactions without netting them with the
positive amounts.  Using this program, DFAS-Denver reran the March
1994 data and found that its negative ULO balances totaled about $7
billion, which was more than 11 times the $630 million of net
balances reported to DFAS headquarters.  Since DFAS-Denver did not
previously maintain gross data on negative ULO balances, it could not
provide us with any trend data prior to March 1994.  However,
DFAS-Denver officials acknowledged that they previously had always
used net values in their reports to DFAS headquarters.  After we
brought this to the DFAS officials' attention, DFAS-Denver included
the gross negative ULO amounts in its June 1994 and subsequent
progress reports. 

In April 1994, DFAS-Denver began to assign staff to review and
correct the $7 billion of negative ULO balances.  In total, 23 staff
were eventually assigned to this task.  As a result of this effort,
DFAS-Denver reported that it had reduced its negative ULOs to about
$2.1 billion as of June 30, 1994. 


--------------------
\5 Generally, only negative ULOs are problem disbursement
transactions.  Positive ULO balances represent the amount remaining
to be spent. 


      NOT ALL ACTIVITIES WERE
      INCLUDED
---------------------------------------------------------- Letter :5.2

When the team calculated the amount of problem disbursements, it did
not include all DOD activities.  According to the DOD team leader,
the team focused its efforts only on the military services because it
believed that the other activities did not have material disbursement
problems comparable to those of the military services.  Our review of
April 30, 1994, disbursement data at the DFAS-Indianapolis Center
identified 23,999 disbursements totaling about $2.4 billion at 36
activities other than the military services that had not been matched
to an obligation.  These amounts included 11,239 disbursements
totaling about $1.5 billion that had remained unmatched for over a
year.  After we brought this to the DOD team leader's attention, he
agreed that other DOD activities should be included but did not know
when or if DOD would begin to do so. 


      SOME TRANSACTIONS WERE
      EXCLUDED
---------------------------------------------------------- Letter :5.3

DOD did not include disbursement transactions if no matching efforts
had yet been attempted, regardless of how old the transactions were. 
The DOD team leader told us that they did not initially include these
types of transactions since aging data were not readily available to
show how long the transactions had remained outstanding.  After our
meeting with the DOD team leader, the DFAS Deputy Director for
General Accounting issued a memorandum on April 21, 1994, that
required the Centers to maintain aging schedules for disbursements. 
He stated that it should never take over 60 days for disbursement
transactions to be forwarded to and received by an accountable
station for matching. 

In response to the DFAS Deputy Director's guidance, the DFAS Centers
reported to DFAS headquarters in June 1994 that their records
included at least $14.8 billion of disbursements as of April 30,
1994, that were over 60 days old and had not yet been received by an
accountable station for matching with an obligation. 


   CHANGE IN FUND CONTROL
   REQUIREMENTS DEMANDS ACCURATE
   RECORDS OF OBLIGATIONS AND
   DISBURSEMENTS
------------------------------------------------------------ Letter :6

An important facet of DOD's disbursement problem is its inability to
accurately account for and report on the amount of obligations and
disbursements for old appropriation accounts.  Of the $24.8 billion
in problem disbursement transactions as of June 30, 1994, about $5
billion was related to canceled appropriations, originally called the
"M" accounts.  Currently, the DOD Comptroller's office has not
provided DOD components with any guidance on how to correct these
problem disbursements in their accounting records. 

In 1990, the Congress changed the law for reporting on old
appropriation accounts\6 because it found that the controls over them
were not working as intended.  Specifically, DOD (which had most of
the "M" and merged surplus authority accounts) had been expending
funds from these accounts without sufficient assurance that authority
for such expenditures existed or in ways that the Congress did not
intend.  The Congress was particularly concerned about (1) the large
balances available to DOD in the "M" and merged surplus accounts,
which totaled a reported $50 billion at the time of the new law, (2)
DOD's access to and routine use of hundreds of millions of dollars
from the "M" accounts and merged surplus authority to cover contract
cost increases, and (3) lack of congressional oversight over these
accounts. 

The Congress passed Public Law 101-510 to strengthen its oversight
and control over expired appropriations.  The law, enacted on
November 5, 1990, canceled the budget authority associated with
obligations recorded in "M" accounts in stages, with the final
cancellation occurring on September 30, 1993.  The new law also
required

  agencies to maintain records for each expired appropriation account
     reflecting obligated and unobligated balances by year for 5
     years and

  cancellation of obligated and unobligated balances for other
     appropriation accounts 5 years after the budget authority
     expires regardless of whether or not goods or services
     contracted for have yet been provided or paid for.  Accordingly,
     an additional year of appropriation accounts was canceled on
     September 30, 1994, and other appropriation accounts will be
     canceled each fiscal year thereafter as each rolling 5-year
     period ends. 

In order to ensure that obligations and expenditures do not exceed
the amounts appropriated, agencies will have to maintain adequate
records by fiscal year of obligated, unobligated, and expended
balances of current, expired, and canceled budget authority. 

The Congress, aware of particular problems with DOD's handling of its
"M" accounts, also included in Public Law 101-510 a requirement that
DOD audit all its "M" accounts by December 31, 1991.  One purpose of
the audit was to establish the total balances of "M" accounts. 
Therefore, to achieve this purpose, DOD would need to properly match
disbursements with obligations associated with those accounts. 

In April 1993, we reported\7 that as of September 30, 1992--or 9
months after the audit of its "M" accounts was to be completed and
nearly 2 years after the passage of Public Law 101-510--DOD had still
not finished its review of "M" account balances.  At that time, DOD
stated that it would complete its review by September 30, 1993--the
date that the final "M" account balances were to be canceled.  As
that date approached, the Department of the Treasury sought our
opinion on whether it was authorized to continue accepting agency
adjustments to canceled DOD "M" account balances after the September
30, 1993, cutoff in order to properly record disbursements associated
with those accounts.  We stated\8 that the Department of the Treasury
could make these adjustments to reflect the completion of accounting
transactions that occurred before the accounts were closed.  In
response to our opinion, the Department of the Treasury granted
agencies until May 31, 1994, to post disbursements that had not been
previously matched to obligations. 

In February 1994, we advised the Secretary of Defense that DOD still
had billions of dollars of disbursements that had not been properly
matched to obligations, many of which were in the "M" accounts, and
asked how DOD planned to deal with the situation.\9

In May 1994, the DOD Deputy Comptroller for Financial Systems
responded that it was unlikely that DOD could identify and correct
all disbursement problems by the May 31, 1994, deadline established
by the Department of the Treasury.  He also asserted that there was
no avenue for correcting errors attributable to closed accounts after
the deadline. 

We disagree with DOD's assertion that it no longer has an avenue to
resolve problem disbursements associated with its canceled "M"
accounts.  As a result of accounts being canceled under Public Law
101-510, agencies must find a source of funds to pay otherwise valid
obligations that did not become payable until after the originally
chargeable account was canceled.  The law provides that with certain
limitations, agencies may pay such obligations out of currently
available appropriations. 

One limitation on this authority is that agencies must be able to
demonstrate that there would have been enough unexpended funds in the
canceled account to make the payment.  Agencies could do this by
showing that there is a sufficient unexpended balance in the
Department of the Treasury account for the appropriation to make the
payment.  However, an account maintained by the Department of the
Treasury ceases to exist once it is canceled under Public Law
101-510.  Therefore, agencies will have to use their own accounting
records as a basis for demonstrating that the payment could have been
made from the canceled account. 

To do this, DOD must maintain current and accurate records of
disbursements attributable to both the canceled "M" accounts and any
subsequent canceled accounts in order to justify using current
appropriations to make payments attributable to these previously
closed accounts.  Therefore, DOD must reconcile the about $5 billion
of problem disbursements related to canceled "M" accounts that had
not been properly matched to obligations as of June 30, 1994.  This
procedure is necessary to ensure that payments do not exceed the
originally appropriated amounts and result in Antideficiency Act
violations.  DOD will also need to retain records of the transactions
related to the canceled appropriation accounts until such time as it
is determined that there are no longer any outstanding claims against
the accounts. 


--------------------
\6 Under the old law, after an appropriation account had been expired
for 2 years, its remaining obligated, but as yet unpaid, balances
were combined with like appropriation accounts from prior years into
merged accounts, commonly referred to as "M" accounts.  Also, the
unobligated balances of these expired appropriations were likewise
combined into merged surplus authority accounts. 

\7 Financial Management:  Agencies' Actions to Eliminate "M" Accounts
and Merged Surplus Authority (GAO/AFMD-93-7, April 2, 1993). 

\8 B-251287, September 29, 1993. 

\9 Letter to the Secretary of Defense (GAO/AIMD-94-84R, February 24,
1994). 


   CORRECTING INTERNAL CONTROL AND
   SYSTEM WEAKNESSES IS KEY TO
   RESOLVING LONG-STANDING
   PROBLEMS
------------------------------------------------------------ Letter :7

We have previously reported\10 that long-standing system problems
hinder DOD's ability to properly match disbursements with
obligations.  Our current review confirmed that DOD continues to
experience serious control weaknesses over its disbursement process. 
Continued management emphasis is essential if DOD is to correct the
material weaknesses that cause negative ULOs and other disbursement
problems.  These weaknesses are cited in the Secretary of Defense's
fiscal year 1993 Annual Statement of Assurance under the Federal
Managers' Financial Integrity Act.\11 In March 1994, the DOD
Comptroller issued guidance aimed at reducing disbursements made in
excess of recorded obligations.  Over the long term, DOD is relying
on its Corporate Information Management (CIM) initiative, which to
date has had only limited success, to improve the existing procedures
and systems involving DOD disbursements as well as the consistency of
data in DOD's financial management systems. 


--------------------
\10 See footnote 1. 

\11 In the Secretary of Defense's fiscal year 1993 Annual Statement
of Assurance, DOD acknowledged that (1) unmatched disbursements,
negative unliquidated obligations, and overpayments to contractors
are material weaknesses and (2) system weaknesses involving the
contract pay and accounting systems must be resolved to correct the
disbursement problems. 


      DOD COMPTROLLER GUIDANCE ON
      DISBURSEMENTS IN EXCESS OF
      OBLIGATIONS
---------------------------------------------------------- Letter :7.1

On March 31, 1994, the DOD Comptroller issued guidance to correct
what he referred to as the long-standing problem of DOD disbursing
funds in excess of recorded obligations.  He directed that (1)
payments not be made until the accounts are corrected or additional
funding is made available if there are not sufficient funds at the
appropriation level to cover the invoice owed and (2) additional
obligational authority be provided, if available, to cover negative
ULOs that have remained outstanding for over 180 days.  In his
transmittal for the guidance, the Comptroller forthrightly stated
that

     "the Department routinely writes checks on accounts that are in
     the red, under the assumption that these accounts are in the red
     because of innocent accounting errors...Even when accounts have
     been in a deficit status for some time, Department procedures
     permit continued expenditure of funds against those negative
     balances...Such practices are clearly contradictory to the
     Antideficiency Act and flatly violate minimum standards of sound
     financial management."

The Comptroller also noted that DOD had accepted the idea that
negative balances were caused by errors and that few people felt
responsible for correcting the problem.  He said that DOD had 23
appropriation accounts that were in the red as of December 31, 1993,
and that he had asked the DOD Inspector General to initiate
investigations for 10 potential Antideficiency Act violations.\12

According to a DOD Inspector General official, three of the
investigations had been completed as of August 1994 and, in all three
cases, the reported deficiencies had been caused by accounting errors
which, when corrected, had not resulted in Antideficiency Act
violations.  The official advised us that the Inspector General was
completing the remaining investigations but could not tell us when
the investigations would be done. 

We believe that the Comptroller's guidance is a first step in
addressing DOD's long-standing disbursement problems.  DOD must make
every effort to ensure that this guidance is properly implemented. 
However, this will not be an easy task given DOD's years of sloppy
bookkeeping, the failure to observe and enforce rudimentary control
features over its disbursement process, and serious deficiencies in
DOD's contract pay and accounting systems.  For example, we found
that DOD continues to experience serious internal control weaknesses
over one of its computer-based disbursement systems, the
Mechanization of Contract Administration Services (MOCAS), which is
used to administer contracts and pay invoices at DFAS-Columbus. 
MOCAS records showed that as of June 30, 1994, 2,551 contracts were
overdisbursed by a total of $1 billion.  This was a $612 million
increase in overdisbursed contracts at that location since July 1993. 

DFAS-Columbus officials told us that they did not have any reports to
show how long the contracts had been in a negative status.  They also
stated that most of the overdisbursements were probably caused by
errors in recording the disbursements or obligations.  They noted
that until detailed reviews of the 2,551 contracts were completed,
they would not know how much, if any, of the $1 billion of recorded
overdisbursements resulted from overpayments or whether they were
caused by accounting errors. 

We agree that each of the 2,551 contracts will have to be reviewed to
determine if contractors were overpaid.  We also believe that there
is a good possibility that some overpayments may have occurred.  For
example, we recently reported\13 that during a 6-month period,
hundreds of contractors returned about 4,000 checks totaling $751
million to DFAS-Columbus.  The $751 million included $305 million of
overpayments, virtually all of which were voluntarily returned by the
contractors. 


--------------------
\12 We previously advised the Secretary of Defense on February 24,
1994, that we had identified five appropriations related to the "M"
accounts that were in a negative status totaling $152.7 million as of
September 30, 1993, (see footnote 9).  According to DOD Comptroller
and DOD Inspector General officials, two of the five "M" accounts are
included in the accounts the Inspector General is currently
investigating, two have been resolved with no Antideficiency Act
violations, and one is still under investigation by the military
service responsible for the account. 

\13 DOD Procurement:  Millions in Overpayments Returned by DOD
Contractors (GAO/NSIAD-94-106, March 14, 1994). 


      SYSTEMS WEAKNESSES WILL NOT
      BE CORRECTED FOR YEARS
---------------------------------------------------------- Letter :7.2

DOD has cited the CIM initiative as the long-term solution to its
systems problems.\14 However, CIM system improvements will not be
implemented for years and DOD has not yet established a milestone
date for completing the CIM work related to its contract payment and
accounting systems. 

According to DFAS officials and the June 10, 1994, Financial Systems
Plan (which is DFAS's overall plan to reduce the number of financial
systems), work being performed under the overall CIM concept is
expected to help resolve DOD's disbursement problems.  The officials
stated that DOD's goal is to have one overall system which would
support both the contract pay and accounting functions.  These
officials also stated that completing the work successfully in
several areas will be key to achieving the overall system goal. 
These areas include the following: 

  Reducing the number of computer data elements for finance and
     accounting.  Currently, there are over 100,000 data elements in
     over 250 DOD finance and accounting systems.  As of July 1994,
     DFAS determined that the finance and accounting community needed
     only 778 data elements, of which 256 have already been approved
     for use. 

  Eliminating duplication of work through single source data entry. 
     Since the data will be entered only once to satisfy the needs of
     all functional areas, including the acquisition and financial
     areas, this should help reduce errors, such as transposing
     numbers. 

We agree with DOD that standardizing accounting information and
related procedures should make processing disbursement transactions
less complex and will help eliminate DOD's disbursement problems. 
However, this will be a difficult task since DOD's disbursing process
is very complex and decentralized.  For example, in the DOD
Comptroller's April 12, 1994, testimony before the Senate Committee
on Governmental Affairs, he noted that the purchase of an F-18
aircraft can take as many as 105 paper transactions and involve
different functional areas, such as budgeting, contracting, and
accounting.  According to the Comptroller, the purchasing process
involves separate chain-of-command organizations that must work
together to accomplish the tasks, and an honest mistake in any one of
the 105 paper transactions can produce inconsistencies that require
extensive manual research to resolve. 

In light of the problems DOD has encountered in developing and
improving its systems over the years, accomplishing CIM's objectives
will be a long-term effort.  Therefore, DOD will have to continue to
rely on existing systems to provide information on the amount of
funds appropriated, obligated, and disbursed and to report this
information to the appropriate congressional committees.  Thus, DOD
needs to pursue short-term efforts to improve the quality of the
information in its systems.  This can be as simple as complying with
existing guidance and procedural requirements for (1) recording
obligations prior to making contract payments, (2) detecting and
correcting errors in the disbursement process, and (3) posting
accurate and complete accounting information in systems that support
the disbursement process.  Otherwise, the problems DOD has
encountered in properly matching disbursements with obligations will
continue. 


--------------------
\14 CIM entails a major effort to improve DOD's operations and
administrative support by streamlining business processes, upgrading
information systems, and improving data administration.  CIM's
objectives include creating more uniform practices for common
functions and improving the standardization, quality, and consistency
of data from DOD's management information systems.  CIM is also
intended to reduce or eliminate systems that perform the same
function.  Our April 12, 1994, report, entitled Defense Management: 
Stronger Support Needed for Corporate Information Management
Initiative to Succeed (GAO/AIMD-94-101), stated that over the past 4
years, DOD has had some success in implementing CIM in certain
functional areas, such as health affairs; in other areas, however,
gains have been marginal. 


   CONCLUSIONS
------------------------------------------------------------ Letter :8

Despite numerous audit reports over the last 14 years that repeatedly
identified DOD's internal control weaknesses, DOD continues to
experience serious problems in accounting for disbursements.  Not
being able to properly match a disbursement to an obligation is a
serious, fundamental breakdown in internal controls and DOD's fund
control systems.  Although DOD has taken some initial steps to reduce
its disbursement problems, serious weaknesses still exist in DOD's
systems, as evidenced by the $24.8 billion of problem disbursement
transactions identified as of June 30, 1994. 

Intensified and sustained top-level management commitment, as called
for by the DOD Comptroller, will be needed to resolve the
disbursement problem.  In the short term, DOD's efforts, including
its manual research of problem disbursement transactions to correct
errors, will likely reduce the amount of disbursements not properly
matched to obligations.  However, the disbursement problem will not
be adequately resolved until (1) weaknesses in control procedures
that allow problem disbursements to occur are corrected and (2)
improvements are made to DOD's contract pay and accounting systems. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :9

We recommend that the DOD Comptroller establish a new benchmark to
measure progress in reducing DOD's disbursement problems.  At a
minimum, the new benchmark figure should (1) include all DOD
activities, (2) be comprised of gross values, and (3) include all
disbursements that have not been received by an accountable activity
for matching with an obligation within 60 days after a payment is
made. 

We also recommend that the DOD Comptroller

  enforce existing regulations requiring DOD activities to record
     obligations and disbursements in an accurate and timely manner
     and

  require DOD activities to reconcile disbursements that have not
     been properly matched to obligations and correct its accounting
     records for all appropriation accounts, including those accounts
     that have been closed. 

We recommend that the DFAS Director require DFAS-Columbus to

  resolve the $1 billion of negative balances for the 2,551 contracts
     in MOCAS and

  report monthly to DFAS headquarters on the number of contracts that
     have expenditures in excess of obligations.  The report should
     include (1) an aging schedule to show specific periods of time
     that the contracts and the related dollar values have been in a
     negative status, (2) the number and dollar amounts of new
     overdisbursed contracts added during the period, and (3) the
     number and dollar amounts of overdisbursed contracts resolved
     during the period. 


---------------------------------------------------------- Letter :9.1

We are sending copies of this report to the Secretary of Defense, the
Director of the Office of Management and Budget, and other interested
parties.  We will make copies available to others upon request. 

Please contact me at (202) 512-6240 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix I. 

David O.  Nellemann
Director, Information Resources
 Management/National Security and
 International Affairs


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I


   ACCOUNTING AND INFORMATION
   MANAGEMENT DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:1

Gregory E.  Pugnetti, Assistant Director
Larry W.  Logsdon, Auditor-in-Charge


   CINCINNATI REGIONAL OFFICE
--------------------------------------------------------- Appendix I:2

Phillip E.  Rutar, Issue Area Manager
Christine R.  McDaniel, Evaluator

RELATED GAO PRODUCTS

DOD Procurement:  Overpayments and Underpayments at Selected
Contractors Show Major Problem (GAO/NSIAD-94-245, August 5, 1994). 

DOD Procurement:  Millions in Overpayments Returned by DOD
Contractors (GAO/NSIAD-94-106, March 14, 1994). 

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

Financial Audit:  Examination of the Army's Financial Statements for
Fiscal Years 1992 and 1991 (GAO/AIMD-93-1, June 30, 1993). 

Financial Management:  Navy Records Contain Billions of Dollars in
Unmatched Disbursements (GAO/AFMD-93-21, June 9, 1993). 

Financial Management:  Air Force Systems Command Is Unaware of Status
of Negative Unliquidated Obligations (GAO/AFMD-91-42, August 29,
1991). 

Financial Management:  Problems in Accounting for DOD Disbursements
(GAO/AFMD-91-9, November 9, 1990). 

Financial Management:  Army Records Contain Millions of Dollars in
Negative Unliquidated Obligations (GAO/AFMD-90-41, May 2, 1990). 

Financial Audit:  Air Force Does Not Effectively Account for Billions
of Dollars of Resources (GAO/AFMD-90-23, February 23, 1990). 

Financial Management:  Air Force Records Contain $512 Million in
Negative Unliquidated Obligations (GAO/AFMD-89-78, June 30, 1989). 

Management Review:  Progress and Challenges at the Defense Logistics
Agency (GAO/NSIAD-86-64, April 7, 1986). 

Defense's Accounting For Its Contracts Has Too Many
Errors--Standardized Accounting Procedures Are Needed (FGMSD-80-10,
January 9, 1980). 
