Defense Business Operations Fund: DOD Is Experiencing Difficulty in
Managing the Fund's Cash (Letter Report, 04/10/96, GAO/AIMD-96-54).

Serious cash management problems at the Defense Business Operations Fund
(DBOF), which disburses about $75 billion annually, jeopardize the goal
of enhancing military readiness through business operations
efficiencies. DBOF managers lack accurate information on cash balances
and, to cover cash shortages, have relied on advance billing for work
yet to be performed. At the end of fiscal year 1995, the Defense
Department had $2.6 billion in outstanding advance billings; the Navy
accounted for nearly $2 billion of that amount. At the same time, DBOF
had about $1 billion in outstanding accounts receivable that were more
than 120 days old and was unable to collect more than $200 million for
completed work because the billing documents did not specify the
activities to bill. If these problems are not resolved, DOD may require
excessive amounts of cash to pay for ongoing Fund operations, and
opportunities for violations of the Antideficiency Act may increase.

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

 REPORTNUM:  AIMD-96-54
     TITLE:  Defense Business Operations Fund: DOD Is Experiencing 
             Difficulty in Managing the Fund's Cash
      DATE:  04/10/96
   SUBJECT:  Financial management systems
             Cash management
             Defense operations
             Industrial funds
             Billing procedures
             Data integrity
             Accounting procedures
             Revolving funds
             Funds management
             Accountability
IDENTIFIER:  Defense Business Operations Fund
             Air Force Financial Inventory Accounting and Billing System
             
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Cover
================================================================ COVER


Report to the Committee on National Security, House of
Representatives

April 1996

DEFENSE BUSINESS OPERATIONS FUND -
DOD IS EXPERIENCING DIFFICULTY IN
MANAGING THE FUND'S CASH

GAO/AIMD-96-54

Defense Business Operations Fund

(511333)


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

  CERPS - Centralized Expenditure Reimbursement Processing System
  CFO - Chief Financial Officer
  DFAS - Defense Finance and Accounting Service
  DLA - Defense Logistics Agency
  DOD - Department of Defense
  EDI - Electronic Data Interchange
  FIABS - Financial Inventory Accounting and Billing System
  FMFIA - Federal Managers' Financial Integrity Act
  IG - Inspector General
  MIPR - Military Interdepartmental Purchase Request
  NADEP - Naval Aviation Depot
  NAVAIR - Naval Air Systems Command
  R&D - Research and Development
  TRANSCOM - Transportation Command

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


B-261997

April 10, 1996

The Honorable Floyd D.  Spence
Chairman
The Honorable Ronald V.  Dellums
Ranking Minority Member
Committee on National Security
House of Representatives

In the committee's report\1 on the fiscal year 1996 Defense
authorization, you raised concerns about the management of the
Defense Business Operations Fund's cash and directed that we review
the Fund's cash management practices.  This report responds to your
request and provides our (1) assessment of the Department of
Defense's (DOD) efforts to manage the Fund's cash and (2)
recommendations to DOD which, if properly implemented, will provide
additional management oversight of the Fund's cash operations. 

Since April 1991, we have reported and testified on the challenges
and problems confronting DOD in the management of the Fund.\2 One
area of continuing concern has been DOD's management of the Fund's
cash.  An enterprise that collects and disburses about $75 billion
annually must have the mechanisms in place to ensure that it fulfills
its responsibilities to DOD management, the Congress, and the
American taxpayers. 


--------------------
\1 House Report 104-131, June 1, 1995. 

\2 See Related GAO Products listed in the back of this report. 


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

The Fund's cash management problems we and the DOD Inspector General
(IG) have reported on in the past persist and are symptomatic of
DOD's long-standing financial management weaknesses.  These problems
could affect decisions impacting DOD's programs.  We found that the
Fund's managers do not have timely, accurate, and complete data on
cash balances for individual business areas.  In addition, the Fund's
monthly financial reports did not fully disclose $5.4 billion in
adjustments that were made to its accounts receivable and payable
balances.  While these problems exist throughout the Department, the
Navy--and the Defense Finance and Accounting Service (DFAS), which
provides accounting services for the Navy--consistently had the most
severe problems in accurately accounting for and reporting on the
Fund's cash. 

DOD has continued to rely on advance billing to generate sufficient
cash for day-to-day operations.  At the end of fiscal year 1995, DOD
had $2.6 billion in outstanding advance billings with Navy having
almost $2 billion of that total.  At the same time, the Fund had
about $1 billion in outstanding accounts receivable that were over
120 days old and is unable to collect over $200 million for work
performed because the billing documents did not identify the specific
activities to bill. 

Until DOD moves to enhance accountability and employs tools to more
effectively manage its cash, managers will continue to receive
inaccurate, incomplete, and untimely information on the Fund's
business areas' cash balance, collections, and disbursements.  If
current practices persist, this could lead to DOD requiring excessive
amounts of cash to maintain ongoing Fund operations, heighten
opportunities for Antideficiency Act violations, and, most
importantly, limit DOD's opportunity to fulfill the objectives of the
Fund--enhancing readiness capability through improved efficiencies in
business operations. 


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

In October 1991, DOD implemented the Fund which consolidated the nine
existing industrial and stock funds operated by DOD as well as DFAS,
the Defense Industrial Plant Equipment Service, the Defense
Reutilization and Marketing Service, the Defense Commissary Agency,
and the Defense Technical Information Service.  The Army, Navy, Air
Force, and Defense agencies industrial and stock funds have
maintained their individual identities as part of the Fund.  The
Fund's estimated fiscal year 1996 revenue of $75 billion makes it
equivalent to one of the world's largest corporations. 

Effective cash management is directly dependent on DOD managers
receiving accurate and timely data on the Fund's cash balances,
collections, and disbursements.  According to DOD's Financial
Management Regulation, Volume 11B, the Fund is to maintain the
minimum cash balance necessary to meet both operational requirements
and to meet disbursement requirements in support of the capital asset
program.  In essence, the Fund is to maintain a minimum cash balance
which, at the same time, is sufficient to cover expenses, such as
paying employees for repairing ships and aircraft and vendors for
inventory items.  Currently, DOD's policy requires the Fund to
maintain cash levels to cover 7 to 10 days of operational costs ($1.5
billion to $2.1 billion) and 4 to 6 months of capital asset
disbursements ($.5 to $.9 billion).  The regulation further provides
that if the overall cash level of the Fund falls below $1 billion,
DFAS will take immediate actions to resolve cash shortages by advance
billing customers. 

Cash generated from the sale of goods and services is the primary
means of the Fund maintaining an adequate level of cash.  The ability
to generate cash consistent with DOD policy is dependent on (1)
accurately setting prices to recover the full costs of producing
goods and services, (2) accurately projecting workload, such as the
number of aircraft to be repaired during the year, and (3) collecting
funds in a timely manner from customers for work performed.  To the
extent that (1) the Fund is not paid for work performed in a timely
manner or (2) DOD cannot produce accurate and timely information on
the Fund's collections and disbursements, unanticipated fluctuations
or, worse yet, cash shortages will occur. 

DOD has experienced continual difficulties in effectively
implementing and operating the Fund.  Since the concept of the Fund
was first put forth in February 1991, we have monitored and evaluated
its implementation and operations.  From its inception, over 4 years
ago, we have pointed out that DOD did not have the procedures and
systems in place to operate the Fund.  In March 1995,\3 we further
reported that DOD's ability to properly manage the Fund continued to
be hindered in part because of its inability to adequately manage the
Fund's cash. 

In May 1995, we testified\4 that we continued to have concerns about
DOD's management of the Fund's cash.  When the Fund was established,
the responsibility for managing cash was placed under the Office of
the Secretary of Defense (Comptroller).  However, on February 1,
1995, cash management and related Antideficiency Act\5
responsibilities were returned to the military service and DOD
component level.  This change was a major departure from the benefits
of a single cash balance DOD cited in establishing the Fund. 
According to DOD officials, the policy was changed to better align
accountability and responsibility for cash management.  DOD pointed
out that the operational control of actions taken by each Fund
activity, which results in cash disbursements and collections, always
has and continues to reside with the military services and DOD
components. 

While this report focuses on cash management problems, they are
symptomatic of the persistent weaknesses in DOD's and the Fund's
financial management operations.  DOD's fiscal year 1995 Federal
Managers' Financial Integrity Act (FMFIA) report highlighted a number
of serious weaknesses in DOD's financial management operations and
systems.  GAO's High-Risk Report Series also pointed out that DOD has
serious, long-standing problems in providing reliable financial and
cost information to those responsible for carrying out and overseeing
DOD's missions and programs.\6 With regard to the Fund, the FMFIA
report identified that it had inadequate accounting and reporting. 
Having systems and reports that provide timely and accurate
information on the Fund's cash balances for individual business areas
and on collections and disbursements is integral to having effective
controls over cash management. 


--------------------
\3 Defense Business Operations Fund:  Management Issues Challenge
Fund Implementation (GAO/AIMD-95-79, March 1, 1995). 

\4 Financial Management:  Challenges Confronting DOD's Reform
Initiatives (GAO/T-AIMD-95-143,
May 16, 1995, and GAO/T-AIMD-95-146, May 23, 1995). 

\5 The Antideficiency Act, 31 U.S.C.  1341(a) (1), 1517, provides
that no officer or employee of the government shall make or authorize
an expenditure or obligation exceeding the amount of an appropriation
or fund available for the expenditure or obligation. 

\6 High-Risk Series:  An Overview (GAO/HR-95-1, February 1995). 


   OBJECTIVE, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

The overall objective of this assignment was to evaluate the Fund's
cash management practices with respect to the functions that impact
on cash, such as billing customers and collecting receivables.  To
accomplish our objective, we (1) interviewed officials in the Office
of the Secretary of Defense (Comptroller), DFAS, the military
services, and Defense components regarding their reporting of monthly
collection and disbursement information for the Fund, (2) reviewed
DOD's cash management policies and procedures to obtain an
understanding of the Fund's cash management practices, and (3)
collected and analyzed for selected Fund business areas financial
information related to collections, disbursements, accounts
receivables, and accounts payable.  In addition, through discussions
with appropriate DOD officials and a review of pertinent documents,
such as the Report on Budget Execution Defense Business Operation
Fund (DD Form 1176) and the Defense Business Operations Fund
Accounting Report (1307), we determined whether the Fund's systems
provided managers with information conducive to managing cash. 

We performed our work at the headquarters, Office of the Under
Secretary of Defense (Comptroller); Departments of the Army, Navy,
and Air Force; Defense Logistics Agency (DLA); Defense Finance and
Accounting Service (DFAS); the Cleveland, Columbus, Denver, and
Indianapolis DFAS Finance Centers; DFAS operating locations in
Norfolk and San Diego; and selected Fund business activities.  Our
review was performed from July 1995 through February 1996, in
accordance with generally accepted government auditing standards. 
The quantitative financial information used in this report on the
Fund's financial operations was produced from DOD's systems and was
not independently verified by GAO.  DOD's fiscal year 1995 FMFIA
report acknowledges inadequacies in the Fund's accounting and
reporting.  In addition, the DOD IG has cited system deficiencies as
one of the major obstacles to the preparation of financial statements
that fairly present the Fund's financial position.\7

We provided a draft of this report to DOD for comment.  On March 20,
1996, we discussed the facts, conclusions, and recommendations in our
draft report with cognizant DOD officials and have incorporated their
comments where appropriate. 


--------------------
\7 Financial Management:  Challenges Facing DOD in Meeting the Goals
of the Chief Financial Officers Act (GAO/T-AIMD-96-1, November 14,
1995). 


   CASH MANAGEMENT INFORMATION
   LACKING
------------------------------------------------------------ Letter :4

The Fund's financial reports are untimely, incomplete, and inaccurate
and, therefore, do not provide Fund managers with the information
they need to manage cash.  Specifically, we found that (1) the
monthly financial reports do not contain cash balances for each
individual Fund business area, (2) collection and disbursement data
are not timely since the data are reported approximately 3 to 4 weeks
after the month in which the transaction took place, and (3) monthly
financial reports do not fully disclose billions of dollars of
adjustments made to accounts receivable and payable balances, which
could mask the actual amount of future collections and disbursements. 
Effective cash management is dependent on the availability of timely
and accurate information that impact the Fund's cash balance.  The
absence of this information could (1) result in an increase in the
Fund's cash requirements to cover the day-to-day fluctuations in the
Fund's cash balance and (2) impact major programmatic decisions which
may be driven largely by cash balance considerations. 


      DOD REPORTS USED FOR
      MANAGING CASH ARE INADEQUATE
---------------------------------------------------------- Letter :4.1

In accordance with DOD policy, the Fund's monthly financial reports
provide cash balance information at the military service and DOD
component level who presently have cash management responsibility. 
However, the Fund's monthly financial reports do not provide cash
balance information on the Fund's individual business areas although
most decisions that impact cash, such as buying inventory items from
vendors, are made at the business area or activity level.  Instead,
the monthly financial reports only show collections and
disbursements.  As such, the reports lack key information such as the
amount of the initial allocation of the cash by DOD to the military
services and DOD components in February 1995, when cash management
responsibility was decentralized.  The initial allocation--a
substantial amount of the Fund's cash--was $1.7 billion,\8 or 39
percent of the Fund's $4.4 billion cash balance at the end of
September 1995. 

Lacking this basic information can put entities charged with
Antideficiency Act responsibilities in the position of having to
comply with the Act without the tools to do so.  For example, since
the Antideficiency Act responsibility was passed from DLA to the
Transportation Command (TRANSCOM) in May of 1995, TRANSCOM managers
are responsible for ensuring that they do not spend more than they
have.\9 However, they do not know their cash balance.  The position
the managers are in is similar to an individual writing personal
checks without ever knowing his or her checkbook balance.  In April
1995, just before cash management responsibility was transferred,
TRANSCOM called attention to the difficulties it would have in
complying with the Act to DLA, stating that it "does not have an
accounting system to properly account for or report cash
transactions," and that "during contingency operations, we have no
control over cash collections of transportation bills." In response
to TRANSCOM's memorandum, the DLA comptroller stated that "the lack
of control over cash cited in your memorandum applies equally to all
Defense agencies, including DLA."

Further, managers only receive official information once a month on
the amount of collections and disbursements that impact the cash
balance.  These data are not timely since they are not received until
3 to 4 weeks after the end of the month in which transactions took
place.\10 For example, the reports for February 1996 will not be
available until the end of March 1996.  As a result, the Fund's cash
can only be managed on a reactive rather than proactive basis. 

The lack of timely data was raised as a serious problem by the Joint
Logistics Commanders who are senior-level general officers.  In a
June 1995 memorandum to the Under Secretary of Defense (Comptroller),
the Joint Logistics Commanders stated that "the current twenty-five
day compilation period is not acceptable for cash management
purposes" and that a "reduction in cycle times for recording and
reporting transactions impacting cash balances is required." They
also stated that "cycle time reduction is of critical importance to
facilitate major programmatic decision[s] which may be driven largely
by cash balance considerations, particularly those made late in the
fiscal year."

DFAS officials recognize that the current reports are not adequate or
timely.  A DFAS official told us that DFAS is currently developing
reporting procedures so that the military services and DOD components
can identify the monthly cash balance for each Fund business area,
such as the Navy shipyard business area or the Air Force depot
maintenance business area.  With respect to the timeliness of the
reports, DOD's Financial Management Regulation on the Fund
establishes a goal to improve cash reporting by providing real-time
cash balances on the Fund's business areas.  However, until the
Fund's financial systems and processes are improved, the ability to
provide the collection and disbursement data more promptly will not
be achieved. 

Further, given that these system improvement efforts will be a
long-term venture, it is important for DOD to concurrently pursue
efforts to improve the quality of the financial information in the
systems today.  In previous reports on the Fund, we have stressed the
need for DOD to improve existing operations and to not wait for
implementation of the new systems to improve the quality of
information.  Operating improvements can be realized under the
present systems through better adherence to existing policies and
procedures and manual correction of existing erroneous data.  In
fact, if the reliability of the information is not improved
dramatically, any new systems will provide the same erroneous data
and perpetuate the operational problems that result from managers not
receiving accurate information. 


--------------------
\8 This amount did not include the Defense Commissary Agency
appropriation and the subsidy payment for the Transportation Command
because these amounts should have been spent by the end of the fiscal
year. 

\9 Originally, TRANSCOM came under DLA's purview for cash management
purposes.  In May 1995, TRANSCOM became the only DOD activity below
the DOD component level delegated with the responsibility for
complying with the Antideficiency Act limitation.  For the remaining
portions of the Fund's cash, the responsibility is with the Army,
Navy, Air Force, Office of the Secretary of Defense (Comptroller),
and DLA for all DOD agencies except TRANSCOM. 

\10 In addition to the cash balance data on the official reports,
DFAS provides estimated cash balance information to the military
services and DOD components on the eighth or ninth day after the end
of the month in which the transactions took place. 


      FINANCIAL REPORTS DO NOT
      DISCLOSE IMPACT OF
      UNDISTRIBUTED DISBURSEMENTS
      AND COLLECTIONS ON ACCOUNTS
      RECEIVABLES AND PAYABLES
---------------------------------------------------------- Letter :4.2

The Fund's financial reports, as of September 1995, showed that the
Fund had $4.5 billion and $920 million of undistributed disbursements
and collections, respectively.  In preparing the Fund's monthly
financial reports, DOD did not fully disclose that billions of
dollars of adjustments were made to its accounts receivable and
payable balances for undistributed disbursements and collections. 

In order to more accurately reflect the true accounts receivable and
payable balance on financial reports, DOD's guidance--Financial
Management Regulation, Volume 11B, Chapter 54--provides that accounts
receivables and payables should be adjusted by the amount of
undistributed collections and disbursements, respectively. 
Conceptually, undistributed collections and disbursements are
collections and disbursements that have been made and reported to the
Treasury but not posted to DOD's records.  Therefore DOD adjusts the
(1) accounts payable balance based on the difference between the
disbursements recorded in the accounting system's general ledger and
the disbursements reported to the Treasury and (2) accounts
receivable balance based on the difference between the collections
recorded in the accounting system's general ledger and the
collections reported to the Treasury.  Normally, adjustments should
reduce receivable and payable balances. 

However, our analysis of the Fund's financial reports and supporting
documentation showed that DOD had negative undistributed
disbursements and collections in some business areas which increased,
instead of decreased, the amounts of accounts payable and receivable. 
These negative amounts can occur for numerous reasons, such as
transactions being reported on the activity records but not on
Treasury records and/or double recording of transactions by the
activities.  For example, as of the end of September 1995, accounts
receivable for the Navy shipyards and the DLA distribution depots
were increased by $542 million and $364 million, respectively, as a
result of negative undistributed collections.  Similarly, accounts
payable for the Military Sealift portion of TRANSCOM increased by
$205 million as a result of negative undistributed disbursements. 

Fully disclosing adjustments on the Fund's monthly reports would
serve to highlight reporting problems, such as negative undistributed
collections and disbursements.  Such negative amounts cast serious
doubts on the accuracy and reliability of the reported account
balances.  If they were fully disclosed on financial reports, they
would serve as "red flags" for management, calling attention to the
fact that the information being reported could be inaccurate and
warrants further analysis, and that corrective action may be needed. 


   ADVANCE BILLINGS CONTINUE
   DESPITE LARGE AMOUNTS OF
   ACCOUNTS RECEIVABLES
------------------------------------------------------------ Letter :5

During fiscal year 1995, DOD continued the practice of advance
billing customers for work it had not yet performed to ensure that
sufficient funds were available to meet day-to-day operating
expenses.  At the end of September 1995, the military services had
advance billings outstanding of $2.6 billion.  Of this amount, the
Navy had about $2 billion or 77 percent of the total.  At the same
point in time, DOD had outstanding accounts receivables of $1.4
billion that were over 60 days old.  If DOD was more aggressive in
collecting these receivables, it could help reduce the Fund's cash
shortage and the need to advance bill customers. 


      ADVANCE BILLING USED TO
      ALLEVIATE CASH SHORTAGE
---------------------------------------------------------- Letter :5.1

Recognizing that the Fund's operations would not generate adequate
cash to complete the transfers of $5.5 billion as required by the
National Defense Authorization Act for Fiscal Year 1993, the DOD
Principal Deputy Comptroller directed in June 1993 that all depot
maintenance and selected Naval research and development activities
advance bill customers for goods and services to be provided.  In
July 1994, the Comptroller of Defense stopped the advance billing at
all activities except the Naval shipyards and research and
development activities.  Although these remaining activities had been
tentatively scheduled to stop advance billing in January 1995, this
did not occur.  In discussing a draft of this report with DOD
officials, they stated that when the responsibility for Fund cash was
returned to the DOD components, along with the associated
Antideficiency Act responsibilities, in February 1995, the amount of
cash returned to the Army, Navy, and Air Force was not sufficient to
cover outstanding Fund liabilities.  The Fund's financial reports
indicate that this was the case, with each of the military services
facing cash shortages.  Therefore, according to DOD, it was necessary
for the military services to continue to advance bill customers so
that their cash portion of the Fund would not go negative. 

The following table provides information on the actual amount of
outstanding advance billings and the reported cash balance for the
military services and the Defense agencies at the end of September
30, 1995. 



                                Table 1
                
                   Advance Billings and Reported Cash
                     Balances at September 30, 1995

                         (Dollars in millions)

                                      Report
                                          ed              Cash balance
                                        cash  Outstandin       without
                                      balanc   g advance       advance
DOD component                              e     billing       billing
------------------------------------  ------  ----------  ------------
Navy                                  $1,609      $1,981        $(372)
Air Force                                545         388           157
Army                                     560         245           315
Defense agencies                       1,602           0         1,602
Office of the Secretary of Defense       124           0           124
======================================================================
Total                                 $4,440      $2,614        $1,826
----------------------------------------------------------------------
The above table shows that if the Navy had not advance billed its
customers, the Navy Fund cash balance would have been a negative $372
million as of September 30, 1995.  In fact, the Navy advance billed
its customers about $1.2 billion during September 1995 to ensure that
the Navy Fund cash balance remained positive--at the end of August
1995, the Navy Fund cash balance was about $40 million.  By
comparison, even without advance billing, the table shows that the
Army and Air Force portion of the Fund had positive balances of $315
million and $157 million, respectively. 

In updating the Fund's cash balance information as of the end of
December 1995, we found that the reported cash balance had
significantly decreased since September 1995.  Over that 3-month
period, the Fund's overall cash balance had decreased from $4.4
billion to $2.1 billion--over a 50-percent reduction.  Navy had the
greatest share of the cash reduction; its balance decreased from
about $1.6 billion to $83 million.  In discussing a draft of this
report with DOD officials, they stated that the Fund would not
advance bill customers during fiscal years 1996 and 1997.  They also
stated that the Army and Air Force would eliminate their outstanding
advance billing balances by the end of fiscal year 1996 and that the
Navy would eliminate its outstanding advance billing balance by the
end of fiscal year 1997.  As part of our ongoing work, we will
continue to monitor the Fund's effort to eliminate the outstanding
advance billing balances. 


      THE FUND HAS LARGE AMOUNTS
      OF ACCOUNTS RECEIVABLES ON
      ITS BOOKS
---------------------------------------------------------- Letter :5.2

One way to help reduce the cash shortage problem is for the Fund to
promptly collect accounts receivables.  Since the Fund is a $75
billion operation and it bills customers at least monthly, it is
normal to have 1 or 2 months of accounts receivables on the books. 
As of September 1995, DFAS reported that the Fund had $6 billion in
accounts receivables for Fund business areas with receivables
exceeding $50 million.  However, about 24 percent of the Fund's
receivables, or $1.4 billion, have been outstanding for over 60 days
with almost $1 billion of this amount outstanding for over 120 days. 
The following table provides aging information on the Fund's accounts
receivables that are over 60 days old. 



                                Table 2
                
                 Accounts Receivables More Than 60 Days
                       Old at September 30, 1995

                         (Dollars in millions)


                                                   91-
Business area                            61-90     120  /> 120   Total
--------------------------------------  ------  ------  ------  ------
Supply Management--Navy                    $24     $31    $255    $310
TRANSCOM--Defense                           45      31     130     206
Supply Management--Defense                  78       8     114     200
Logistics Support--Navy                     13       9      93     115
Communications Information Services--       39      25      46     110
 Defense
Distribution Depots--Navy                   12       9      86     107
Subtotal                                   211     113     724   1,048
All Other Business Areas                    53      65     260     378
======================================================================
Total                                     $264    $178    $984  $1,426
----------------------------------------------------------------------
The DOD Financial Management Regulation, Volume 4, provides that
"procedures shall be established for the routine aging of all amounts
overdue so that appropriate actions can be taken to effect their
collection.  The aggressive and efficient management of receivables
in the Department of Defense is an important element of DOD
stewardship over public funds." However, as the above table shows,
DOD has not collected the accounts receivables in a timely manner. 
Some examples of why the Fund has not been collecting receivables in
a timely manner are highlighted below and are discussed in further
detail in appendix I. 

  DFAS was not reimbursed $57 million by the Army and $34 million by
     the Navy in a timely manner for work performed in fiscal years
     1993 and 1994.  DFAS was paid 6 months to 2 years after it
     performed this work.  Further, as of February 2, 1996, the Navy
     still has not reimbursed DFAS $7 million for work performed
     during fiscal years 1993 or 1994.  DFAS was not paid primarily
     because it was performing work before receiving a funding
     document from its customers as generally required by the DOD
     Financial Management Regulation. 

  As of September 30, 1995, DFAS' accounts receivable report showed
     that TRANSCOM had $697 million of accounts receivable.  Of that
     amount, $437 million had not been billed to customers.  For
     example, during fiscal years 1993 and 1994, TRANSCOM performed
     about $104.5 million of transportation services but had not
     received reimbursement as of February 16, 1996--1 to 3 years
     after the work was performed.  TRANSCOM has not been reimbursed
     primarily because the billing documentation did not identify the
     specific activities to be billed. 

In discussing a draft of this report with DOD officials, while
agreeing to pursue collection of the receivables, they stated that
accounts receivable data provide misleading information to DOD
managers since some of these receivables will not be collected.  They
said they needed to determine the collectibility of the receivables
and write-off amounts determined to be uncollectible.  However, since
most of the receivables are from DOD activities, if they were valid
receivables, it would seem they should be collectible.  Therefore,
DOD needs to aggressively pursue collecting the receivables and fully
document why any receivables would not be collectible.  Because the
Fund is a revolving fund, promptly being reimbursed for work
performed is essential to its financial stability since this is the
principal means through which it receives moneys needed to cover
operating expenses.  Further, the lack of timely reimbursements may
result in cash fluctuations throughout the fiscal year and therefore
lead to possible additional advance billing of customers. 


   NAVY CASH MANAGEMENT PROBLEMS
   ARE THE MOST SEVERE
------------------------------------------------------------ Letter :6

Although problems discussed in this report transcend the entire
Department, they were most prevalent with the Navy and DFAS
activities providing accounting services to the Navy.  The
difficulties in accurately accounting for and reporting on the Navy's
portion of the Fund's cash are highlighted below and discussed in
more detail in appendix II. 

  Processing of interfund transactions, which occur when one DOD
     activity sells or buys goods and/or services from another DOD
     activity, resulted in the overstatement of business area
     cash--collections less disbursements--on the departmental level
     financial reports.  Although this problem impacts several
     business areas, it is the most severe in the Naval Aviation
     Depots.  Within the aviation depots alone, Navy officials
     acknowledged that cash may be overstated anywhere from $800
     million to $1 billion. 

  As discussed earlier, recording of undistributed transactions
     distorted the amount of collections and disbursements reported
     on the Fund business areas' financial reports.  The Navy/DFAS
     routinely recorded undistributed collections and disbursements
     in the Research and Development business area financial reports,
     rather than allocating the amounts to the appropriate business
     areas.  This resulted in an understatement of cash in the
     Research and Development business area and a corresponding
     overstatement of cash in the other business areas.  As a result,
     management did not have an accurate picture of the business
     areas' collections, disbursements, and cash for use in the
     decision-making process. 

  Large unreconciled cash differences exist at the Naval Aviation
     Depots.  As of September 30, 1995, the unreconciled cash
     differences at the aviation depots ranged from a negative $15
     million to a positive $375 million.  A comptroller official with
     the Naval Air Systems Command (NAVAIR) stated that visibility
     over cash within NAVAIR had been lost. 

Since the Navy constitutes approximately $23 billion or 31 percent of
the Fund's estimated fiscal year 1996 revenue of $75 billion, until
the problems with the Navy cash balances are resolved, the accuracy
of the financial information on the Fund's operations will continue
to be highly questionable.  We have discussed these matters with
cognizant Navy and DFAS officials, and, based on these discussions,
they have initiated actions that, if properly implemented, should
help resolve the problems.  For example, DFAS and the Navy have
developed specific funding codes to help resolve problems related to
processing interfund transactions. 


   FUND FINANCIAL STATEMENTS
   AUDITS ALSO IDENTIFIED CASH
   MANAGEMENT PROBLEMS
------------------------------------------------------------ Letter :7

Since the inception of the Fund, the DOD IG and the military service
audit agencies have audited the Fund's financial statements, prepared
pursuant to the requirements of the CFO Act.  These audits have
continually identified serious problems in the Fund's financial
statements which relate to the Fund's cash management practices.  The
DOD IG was not able to render an opinion on the Consolidated
Statement of Financial Position of the Fund as of September 30,
1994,\11

because of the lack of a sound internal control structure for the
Fund and significant instances of noncompliance with regulations. 
Some problems related to the Fund's cash, accounts receivable, and
accounts payable identified in DOD IG and military service audit
agency reports are highlighted below. 

  Unsupported and unverified transactions recorded in DLA's
     distribution depot and the Air Force depot maintenance business
     areas caused accounts receivable to be misstated by $511.8
     million.\12

  The Naval Audit Service reported that the accounts payable for the
     Navy portion of the Fund was overstated by a net estimated
     amount of $52.4 million.  Overstatements were caused by
     activities paying recorded payables in fiscal year 1994 without
     adjusting accounts payable, insufficient supporting documents,
     and bookkeeping and input errors.\13

  The Air Force Audit Agency reported that the Financial Inventory
     Accounting and Billing System (FIABS) did not record accounts
     payable for $2.4 billion disbursed for reparable item purchases
     and repairs.  Additionally, FIABS did not maintain subsidiary
     records to support $96.9 million owed to vendors for purchased
     consumable items.  As a result, users of the financial
     information did not have accurate accounts payable balances to
     project future cash outlays.\14

Although established as a business operation, the Fund has yet to
pass the test of an annual financial statement audit--for fiscal
years 1993 and 1994, the DOD IG could not render an audit opinion on
the Fund's consolidated financial statements. 


--------------------
\11 This was the last fiscal year for which audited financial
statements were available at the time of our review. 

\12 Defense Business Operations Fund Consolidated Statement of
Financial Position for Fiscal Year 1994 (DOD IG Report No.  95-267,
June 30, 1995). 

\13 Fiscal Year 1994 Consolidating Financial Statements of the
Department of the Navy Defense Business Operations Fund (Naval Audit
Service Report 044-95, May 30, 1995). 

\14 Review of Selected Accounts, Supply Management Business Area,
Fiscal Year 1994 (Air Force Audit Agency Project 94068041, June 27,
1995). 


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

The cash management problems we identified in this report are only a
facet of the broader financial management weaknesses confronting the
Fund and DOD overall.  Successful implementation of the CFO Act will
be key to solving DOD's long-standing financial management
weaknesses.  In the interim, by correcting the Fund's cash management
problems, DOD can provide better tools than currently available to
the Fund's business area managers for use in the decision-making
process.  While the Fund's cash balance is managed at the military
service and DOD component level, most decisions that impact cash,
such as buying inventory items from vendors, are made at the business
area or activity level.  However, the poor state of cash-related
information DOD managers have to work with severely inhibits their
ability to manage the Fund's cash.  This is evident by the fact that
DOD relies on advance billing of customers for work not yet performed
to ensure that the Fund has sufficient funds available to meet its
day-to-day operating expenses.  Covering cash shortages in this
manner does not provide the necessary incentives to effectively
manage certain business processes of the Fund that are related to
cash such as collecting accounts receivables in a timely manner. 
Unless a high priority is placed on correcting these problems, the
status quo will be perpetuated, and the Fund will continue to be
limited in its ability to carry out its original objective of
enhancing readiness capability through business operation
efficiencies. 


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

We recommend that the Under Secretary of Defense (Comptroller)

  identify the cash balance for each business area in the Fund's
     monthly 1307 financial report,

  fully disclose in the monthly 1176 and 1307 reports the amount of
     the adjustments made to the accounts receivable and payable
     balances for undistributed collections and disbursements,

  validate and aggressively pursue the collection of accounts
     receivables especially those over 60 days old, and

  direct DOD activities to follow existing DOD Financial Management
     Regulation and provide funding documents to the Fund prior to
     the Fund beginning work. 


   AGENCY COMMENTS
----------------------------------------------------------- Letter :10

On March 20, 1996, we discussed a draft of this report with officials
of the Secretary of Defense (Comptroller), Army, Navy, Air Force,
DFAS, and DLA, who are responsible for the Fund's cash management. 
In general, these officials agreed with the report's findings,
conclusions, and recommendations.  Regarding the accounts receivable
information and DOD's view that some of the receivables may not be
collectible as noted earlier in this report, we modified the proposal
contained in our draft report to recommend that DOD validate the
Fund's accounts receivable balances. 


--------------------------------------------------------- Letter :10.1

We are sending copies of this report to the Secretary of Defense; the
Director of the Office of Management and Budget; the Chairmen and
Ranking Minority Members of the Senate Committee on Armed Services;
the Senate Committee on Governmental Affairs; the House Committee on
Government Reform and Oversight; the Subcommittee on Government
Management, Information, and Technology, House Committee on
Government Reform and Oversight; and the House and Senate Committees
on Appropriations; and other interested parties.  Copies will be made
available to others upon request. 

Please contact me at (202) 512-6240 if you or your staffs have any
questions concerning this report.  Other major contributors to this
report are listed in appendix III. 

Jack L.  Brock, Jr.
Director, Defense Information and
 Financial Management Systems


THE FUND IS EXPERIENCING
DIFFICULTY BEING REIMBURSED FOR
SERVICES PROVIDED
=========================================================== Appendix I

Since the Fund is a revolving fund, being promptly reimbursed for
work performed is essential to its financial stability.  As the Fund
performs work and incurs costs, it bills customers on the basis of
predetermined prices--commonly referred to as "stabilized" or
"standard" prices.  These payments are then used to finance
subsequent operations, much as sales revenues are used in commercial
enterprises.  As stated in this report, we identified numerous
instances in which the Fund was not being reimbursed in a timely
manner for services performed.  As of September 1995, 24 percent of
the Fund's receivables, or $1.4 billion, had been outstanding for
more than 60 days.  This constricts management's ability to manage
cash efficiently, and it could increase the requirements of the Fund
to cover the cash fluctuations throughout the fiscal year.  The
following details the instances we identified in which customers did
not reimburse the Fund in a timely manner. 

DFAS NOT PROMPTLY REIMBURSED FOR
SERVICES PROVIDED

Each year, DFAS performs about $1.5 billion of accounting and finance
work, such as paying civilian and military personnel for the military
services and Defense agencies.  However, DFAS was not reimbursed $57
million by the Army and $34 million by the Navy in a timely manner
for work performed in fiscal years 1993 and 1994.  In addition, DFAS
still has not been reimbursed $7 million for Navy work performed in
fiscal years 1993 or 1994.  In this case, the Navy did not send DFAS
a funding document to cover routine DFAS accounting services.  DFAS
and the Navy have been working on resolving this problem, and DFAS
recently requested that the Navy provide a funding document--called a
Military Interdepartmental Purchase Request (MIPR)--for $7 million to
cover DFAS services performed in fiscal years 1993 and 1994. 

Chapter 61 of the DOD Financial Management Regulation on the Fund
provides that "as a general rule, no work or services should be
performed by a Defense Business Operations Fund activity except on
the basis of reimbursable orders received and accepted that
constitute obligations of Federal Government ordering activities or
advances from non Federal Government entities."

The following details cases we identified in which the Army and Navy
did not promptly reimburse DFAS. 

  DFAS performed $17 million of work in fiscal year 1993 and $40
     million of work in fiscal year 1994 that the Army did not pay
     for until the following fiscal year.  To finance the fiscal year
     1993 work, the Army issued MIPRs to DFAS.  The Army issued 38
     MIPRs, dated between April 1994 and October 1994, to DFAS--at
     least 6 months after the end of fiscal year 1993.  To finance
     the fiscal year 1994 work, the Army issued 9 MIPRs, dated
     between June 1995 and September 1995 to DFAS--at least 8 months
     after the end of fiscal year 1994. 

  DFAS performed $41 million of Navy work in fiscal years 1993 or
     1994 for which it did not receive payment in a timely manner. 
     In October 1995, the Navy paid DFAS $34 million for this work--1
     to 2 years after the work was done.  As of February 2, 1996, the
     Navy still had not reimbursed DFAS for $7 million for the work
     performed during this time period. 

Army and Navy officials informed us that they did not pay bills
promptly because they did not always receive sufficient details from
DFAS on the bills, including information on how much money was owed
by the different activities within a service.  DFAS officials told us
that, since the Army and Navy raised the concern on the billing
detail, DFAS has begun to include in its bills to the services more
detailed information, such as (1) the identification of the specific
customer that will pay the bill and (2) the type of work performed
such as maintaining pay accounts. 

DFAS officials also told us that they were performing work for the
military services and DOD components without always having received a
funding document from the military services or DOD components.  They
told us that (1) this has been a continual problem since DFAS became
part of the Fund in fiscal year 1992 and (2) the military services
and DOD components knew that DFAS was going to perform some
accounting services even without receiving a funding document.  To
resolve the DFAS funding problem, the Under Secretary of Defense
(Comptroller) issued memorandums to the military services and DLA in
August 1995 requiring them to fund the full fiscal year 1996 DFAS
amount no later than 10 working days after the apportionment
reflecting the fiscal year 1996 Appropriations Act. 

DISTRIBUTION DEPOTS ARE ALSO
EXPERIENCING TIMELINESS PROBLEM IN
BEING REIMBURSED

Similar to DFAS, DLA distribution depots, which are responsible for
receipt, storage, and issue of inventory items, are not promptly
reimbursed for the work they have performed.  This is occurring
chiefly because the distribution depots also are performing work
before receiving a funding document from their customers. 

To illustrate, on November 6, 1995, or 1 month after the beginning of
fiscal year 1996, we requested from DLA a listing of those activities
that had provided the distribution depots with fiscal year 1996
funding documents and those activities that had not provided them
funding documents.  We found that, at the time, 19 activities had
provided the distribution depots funding documents totaling about $78
million.  However, 18 activities had not provided the distribution
depots with funding documents.  After we requested the information,
the 18 activities eventually provided the distribution depots with
funding documents totaling $174 million.  Of that amount, about $167
million was received in December 1995.  Because the distribution
depots did not receive funding documents in time, they could not bill
some customers for work performed in October and November 1995 until
December 1995. 

In addition to the funding document problem, the distribution depot
billing process is manual, which precipitates other problems because
it is time-consuming and can cause clerical errors.  For example,
clerical errors resulted in $234 million of collections being
improperly recorded in March 1995.  As a result, large fluctuations
were shown on the distribution depot business area's monthly reports
on budget execution (1176 report) as the errors were corrected. 
Specifically, the cumulative collection balances for February, March,
and April 1995 were $404 million, $769 million, and $570 million,
respectively.  Since the monthly reports provide cumulative balances,
the collection amount should be increasing each month.  However, the
April balance is almost $200 million less than the March balance. 

DFAS-Columbus, which provides accounting services for the
distribution depots, recognizes that it needs to automate the manual
billing process.  In fiscal year 1993, a system change request was
made to automate the billing process.  Current DFAS plans show that
automating the billing process will be done in three segments with
the initial segment being implemented in June 1996.  The first
segment is to include such features as establishing a new subsidiary
ledger, identifying customers, and capturing funding document
information.  The second and third segments, which are expected to be
implemented in January 1997 and January 1998, respectively, are to
add such features as the issuance and acceptance of funding documents
by electronic data interchange (EDI), automatic updates to general
ledger accounts, EDI transfer of funds capability, status of funds
reports to customers, and an interface of billing data to the
disbursing and collection system. 

TRANSCOM HAS NOT BEEN REIMBURSED
FOR TRANSPORTATION SERVICES

As of September 1995, DFAS' accounts receivable aging report showed
that TRANSCOM had $697 million of accounts receivable.  Of that
amount, $437 million, or 63 percent, of accounts receivable had not
been billed.  Because of the severity of the accounts receivable
problem, on November 20, 1995, the Under Secretary of Defense
(Comptroller) issued a memorandum to TRANSCOM pointing out that (1)
"TRANSCOM appears to have the highest percentage of total accounts
receivable, as well as unbillable receivables, within DBOF" and (2)
"since reducing aged receivables remains an important financial goal
as well as integral to sound cash management, TRANSCOM needs to again
focus on solutions to this problem."

According to TRANSCOM and DFAS officials, in some cases TRANSCOM has
not billed customers because it does not know who to bill due to
invalid billing codes.  TRANSCOM estimates that this problem accounts
for more than $125 million of its unbilled amount.  Another $100
million is unbilled because customers rejected bills--a problem that
also may be related to invalid billing codes.  For example, during
fiscal years 1993 and 1994, the Air Mobility Command of TRANSCOM
performed about $104.5 million of transportation services for the
Army and/or DLA but has not received reimbursement as of February 16,
1996.  Of the $104.5 million, TRANSCOM performed $61.1 million and
$43.4 million of transportation services in fiscal years 1993 and
1994, respectively.  TRANSCOM has not received reimbursement
primarily because the billing documentation did not identify the
activities to be billed.  According to TRANSCOM and DFAS officials,
$91 million of the $105 million relates to the use of invalid billing
codes.  They are now researching each shipment 1 to 3 years old to
identify a valid code and which activity should pay the bill. 

To resolve the accounts receivable problem, DOD established a joint
working group comprised of TRANSCOM, Transportation Component
Commands, and DFAS functional experts in June 1995.  Many factors
contributing to the accounts receivable problem originate in the
transportation operation systems and processes that provide the
accounting system data which DFAS uses to bill and collect customer
dollars.  The joint working group is currently discussing changes
that need to be made to the systems to correct the problem. 

MILITARY SEALIFT COMMAND'S
COLLECTIONS NOT RECORDED PROMPTLY

During fiscal year 1995, collections for the Military Sealift Command
portion of TRANSCOM were not processed by DFAS for the months of
April and June 1995.  According to Military Sealift Command
officials, the collections for these 2 months were not processed
because DFAS did not input the data into the disbursement/collection
system.  This resulted in large fluctuations in net outlays (the
difference between disbursements and collections) from month to
month.  Officials informed us that the collection cycles were
processed in subsequent months. 

The actual Military Sealift Command's collections processed from
March through July are shown in the following table. 



                               Table I.1
                
                  Military Sealift Command Collections
                 Recorded From March Through July 1995

                         (Dollars in thousands)

Month                                                           Amount
--------------------------------------------------------------  ------
March 1995                                                      $106,8
                                                                    78
April 1995                                                           0
May 1995                                                        182,18
                                                                     8
June 1995                                                            0
July 1995                                                       207,99
                                                                     4
----------------------------------------------------------------------
As table I.1 shows, there is an irregular pattern in reporting
collections by the Military Sealift Command.  Since the Military
Sealift Command is part of TRANSCOM, not processing collections makes
TRANSCOM's cash management responsibilities difficult to perform. 
Chapter 61 of the DOD Financial Management Regulation, Volume 11B, on
the Fund provides that billings and collections shall be accomplished
at least monthly and include applicable labor, material, overhead,
and surcharges.  Processing the collection data each month is
critical because this is the mechanism through which the Fund obtains
the funds necessary to help finance its day-to-day operations.  As
previously discussed, DOD recognizes that the transportation business
area has financial problems and has established a joint working group
to resolve these problems. 


NAVY FACES FORMIDABLE CHALLENGE IN
MANAGING FUND CASH
========================================================== Appendix II

The Navy--and DFAS activities providing accounting services to the
Navy--had the most problems accurately accounting for and reporting
on the Fund's cash.  Specifically, we found problems with the (1)
processing of interfund bills that overstated business area cash on
the departmental level financial reports, (2) reporting of collection
data that overstated Treasury cash, (3) treatment of undistributed
transactions on financial reports that distorted business area
collections and disbursements information on financial reports, and
(4) accountability over cash at the Navy Aviation Depots (NADEPS). 
Effective cash management is directly dependent on the availability
of accurate and timely data on cash levels.  These problems could (1)
result in an increase in the Fund's cash requirement to cover the
day-to-day fluctuations in the Fund's cash balance and (2) impact
major programmatic decisions, which may be driven largely by cash
balance considerations. 

INTERFUND BILLING OVERSTATES
BUSINESS AREA CASH

Interfund billing transaction processing problems at DFAS-Cleveland
have resulted in Navy business area disbursements being misstated on
the Fund's monthly 1176 financial report.  Navy and DFAS officials
informed us that this problem has resulted in misstated reported
disbursements for several Navy business areas, such as the NADEP,
Shipyard, Ordnance, and Research and Development business areas. 
They also stated that the NADEPs have the biggest disbursement
reporting problem.  The officials estimated that the interfund
problem has resulted in an overstatement of NADEPs' cash anywhere
from $800 million to over $1 billion.  This reflects a breakdown in
controls in DOD's disbursement process and creates problems in
reconciling the departmental and activity-level books. 

Interfund transactions occur when one DOD activity sells or buys
goods and/or services from another DOD activity.  The Navy's
interfund processing problem primarily occurs when the Army, Air
Force, or DLA sells material to Navy depot maintenance activities and
uses nonspecific codes to identify the Navy buying activity.  This
results in interfund disbursement transactions not being charged to
the Navy activity buying the material in Navy's departmental level
accounting records.  DFAS and Navy officials told us that this is not
a new problem.  Various documents disclosed that the Navy has had
problems with processing interfund transactions since the early
1980s. 

We discussed the interfund transaction processing problem with DFAS
headquarters officials, and, as a result, DFAS has developed a
listing of specific activity fund codes for use by the military
services and DLA.  The Navy and DFAS are currently developing
implementing procedures for the DOD activities to use these fund
codes. 

ESTIMATION OF COLLECTIONS RESULTS
IN OVERSTATEMENT OF CASH BALANCE

In May 1995, the Naval Audit Service reported\1 that the Navy Fund
supply management business area inappropriately reported estimated
collections resulting from sales rather than actual collections. 
While estimating collections based on sales has been a long-standing
Navy practice since ships and other activities are sometimes late in
reporting actual collections, current DOD and DFAS guidance states
that collections from sales are to be based on actual collection
transactions and not estimates.  Because this guidance was not
followed, the Navy's (Aviation Supply Office) cash was overstated by
$670 million on DOD's and the Treasury's accounting records.  DOD
agreed with the Naval Audit Service's finding that the Navy/DFAS
should not be estimating collections for the Navy Aviation Supply
Office. 

The overstatement of cash occurred when the Navy and DFAS implemented
an accounting system change.  Because of the change, duplicate
collections were reported when DFAS paying offices estimated
collections for the Naval Aviation Supply Office in one financial
transaction register while actual collections were being reported in
another register.  To correct this problem and accurately report
actual collections for the Aviation Supply Office, DFAS made a $670
million net adjustment (collections less disbursements) to the
accounting records in May 1995, which reduced the Navy Fund cash
balance on DOD's and the Treasury's books.  However, we found that
the Navy/DFAS is still estimating collections for 87 other Navy
activities.  As of September 1995, the Navy/DFAS had estimated
collections of $150 million resulting from sales. 

To curtail this practice, DFAS headquarters sent a memorandum, dated
December 29, 1995, to its activities instructing them that "effective
immediately, the practice of estimating collections and disbursements
is prohibited." The memorandum further instructs DFAS to contact the
activities not reporting actual collections in time to meet the
Treasury reporting cut off date and obtain the actual amounts in lieu
of using estimates.  If attempts to get the actual collection amounts
fail, the financial reports prepared by DFAS are to be footnoted to
disclose the activities missing from the reports.  The Navy agrees
with DFAS that the use of estimates is inappropriate for financial
reporting.  However, the Navy informed DFAS that eliminating this
practice is subject to the development of procedures that provide for
the processing of actual collection data for activities not able to
meet the Treasury reporting cut off date. 

UNDISTRIBUTED TRANSACTIONS DISTORT
BUSINESS AREA CASH

Navy/DFAS treatment of undistributed transactions resulted in
significant misstatements of cash for Navy business areas. 
Specifically, Navy's Research and Development (R&D) business
area--rather than the appropriate business areas--were allocated
undistributed amounts at the request of the Navy.  This treatment of
undistributed transactions misleads report users by distorting
business area disbursements and collections, resulting in an
understatement of R&D cash and an overstatement of the other Navy
business areas' cash.  The following table shows the amount of
undistributed disbursements and collections that were recorded in R&D
for fiscal years 1993 and 1994. 



                               Table II.1
                
                 Undistributed Transactions Recorded in
                  the Navy's Research and Development
                 Business Area During Fiscal Years 1993
                                and 1994

                         (Dollars in millions)

                                   Undistribut  Undistribu
                                            ed         ted         Net
                                   disbursemen  collection      amount
Fiscal year                                  t           s      in R&D
---------------------------------  -----------  ----------  ----------
1994                                    $167.9       $ 0.9      $167.0
1993                                     439.4        36.1       403.3
----------------------------------------------------------------------
We have discussed the treatment of undistributed disbursements and
collections for financial reporting purposes with both DFAS and Navy
Comptroller officials.  Subsequently, a DFAS official told us that
the undistributed disbursements and collections were allocated to the
appropriate business area in the Fund's monthly financial reports
beginning in September 1995. 

UNRECONCILABLE CASH DIFFERENCES
EXIST AT NAVY AVIATION DEPOTS

We also found that there are significant differences in cash amounts
between the NADEPs' accounting records and the department-level
records contained in the Centralized Expenditure Reimbursement
Processing System (CERPS) that cannot be reconciled.  This situation
has caused considerable concern within Naval Air Systems Command
(NAVAIR), which has overall responsibility for NADEP operations.  A
NAVAIR comptroller official told us that visibility over Fund cash
within NAVAIR has been lost and that nobody knows what the cash
balance is or should be.  As a result, NAVAIR's ability to adequately
manage the Fund's cash is severely inhibited.  As of September 30,
1995, unreconcilable cash differences at the NADEPs ranged from a
negative $15 million to a positive $375 million.  The following table
shows these unreconcilable amounts by individual NADEP. 



                               Table II.2
                
                   Unreconcilable Cash for the Naval
                Aviation Depots as of September 30, 1995

                         (Dollars in millions)

                                                            Unreconcil
                                                  Treasury        able
NADEPs                             CERPS cash         cash      amount
---------------------------------  ----------  -----------  ----------
Jacksonville                              $83          $99       ($16)
Cherry Point                               84           93         (9)
Pensacola                                  33         (19)          52
Alameda                                   206         (78)         284
North Island                              446           71         375
Norfolk                                  (67)         (69)           2
----------------------------------------------------------------------
Because of the current process used to account for and report
disbursement and collection data, there are three different cash
balances for the individual NADEPs depending on the accounting
records from which the balances are obtained:  (1) an amount recorded
on the NADEPs' activity accounting records, (2) an amount reported by
CERPS, and (3) an amount reported as the Navy Comptroller Treasury
balance.  In theory, the amount reported by CERPS and the amount
reported as the Navy Comptroller Treasury balance should be the same
because they are derived from the same disbursement and collection
transactions.  However, this is not the case.  The Navy Comptroller
Treasury amount contains disbursement and collection information from
various financial registers that are not made available to the
NADEPs.  As a result, the CERPS and Navy Comptroller Treasury amounts
do not agree. 

When the NADEPs perform cash reconciliations between their activity
records and departmental records, they can usually reconcile the
differences between the activity and CERPS amounts being reported,
for example, differences that occur in the timing of when
transactions are recorded in the activities records versus when the
transactions are reported to the Treasury.  However, they cannot
reconcile the differences between CERPS and the Navy Comptroller
Treasury balance because of the missing financial register
information.  Even if the NADEPs had the missing information, they
would still have trouble reconciling the amounts because the
interfund processing problem discussed above is contributing to some
of the unreconcilable amounts.  Because of the (1) different cash
balances the NADEPs must use when reconciling cash and (2) missing
financial registers, the NADEPs include qualifying language in their
fiscal year-end certification of the financial statements that
references the three different cash balances as well as the missing
financial information.  In discussing a draft of this report with DOD
officials, they acknowledged that having three cash balances is a
problem and that they are taking actions to eliminate one of the cash
balances by providing the NADEPs the missing financial register
information. 


--------------------
\1 Fiscal Year 1994 Consolidating Financial Statements of the
Department of the Navy Defense Business Operations Fund (Naval Audit
Service-44-95, May 30, 1995). 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Gregory E.  Pugnetti, Assistant Director
Darby W.  Smith, Assistant Director
Ron L.  Tobias, Senior Auditor-in-Charge
William A.  Hill, Senior Auditor
Cristina T.  Chaplain, Communications Analyst


RELATED GAO PRODUCTS
============================================================ Chapter 0

Defense Business Operations Fund:  Management Issues Challenge Fund
Implementation (GAO/AIMD-95-79, March 1, 1995). 

Defense Budget:  Capital Asset Projects Undergo Significant Change
Between Approval and Execution (GAO/NSIAD-95-20, December 28, 1994). 

Letter to the Principal Deputy Comptroller (GAO/AIMD-94-159R, July
26, 1994). 

Defense Business Operations Fund:  Improved Pricing Practices and
Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132,
June 22, 1994). 

Financial Management:  DOD's Efforts to Improve Operations of the
Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-170, April 28,
1994). 

Defense Management Initiatives:  Limited Progress in Implementing
Management Improvement Initiatives (GAO/T-AIMD-94-105, April 14,
1994). 

Financial Management:  DOD's Efforts to Improve Operations of the
Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-146, March 25,
1994). 

Financial Management:  Status of the Defense Business Operations Fund
(GAO/AIMD-94-80, March 9, 1994). 

Letter to the Deputy Secretary of Defense (GAO/AIMD-94-7R, October
12, 1993). 

Financial Management:  Opportunities to Strengthen Management of the
Defense Business Operations Fund (GAO/T-AFMD-93-6, June 16, 1993). 

Financial Management:  Opportunities to Strengthen Management of the
Defense Business Operations Fund (GAO/T-AFMD-93-4, May 13, 1993). 

Letter to Congressional Committees (GAO/AFMD-93-52R, March 1, 1993). 

Financial Management:  Status of the Defense Business Operations Fund
(GAO/AFMD-92-79, June 15, 1992). 

Financial Management:  Defense Business Operations Fund
Implementation Status (GAO/T-AFMD-92-8, April 30, 1992). 

Defense's Planned Implementation of the $77 Billion Defense Business
Operations Fund (GAO/T-AFMD-91-5, April 30, 1991). 


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